Southern Ontario Housing Market: Why Demand Is at a 15+ Year Low
Southern Ontario’s resale housing market is experiencing its weakest demand since the 2008-09 financial crisis. Home sales have plunged from the pandemic-era frenzy to levels last seen over a decade ago. Multiple factors are behind this slowdown – from rising interest rates squeezing affordability to shifting consumer sentiment, low inventory, price dynamics, policy changes, and demographic trends. This analysis clearly explains the market conditions and anticipates what’s next.
Monthly home sales in Canada sank in 2022-2023 to their lowest levels since the 2008-09 recession. The sharp drop (following record sales in 2021) reflects a steep fall in buyer demand after interest rates spiked. Southern Ontario, which led the prior boom, has been hit particularly hard as higher borrowing costs sidelined many buyers. The market shift is evident in the dramatic reversal from a seller’s market to balanced conditions, with sales running well below the 10-year average.
Interest Rate Hikes and Mortgage Affordability
A rapid rise in interest rates has been the number one factor cooling housing demand. The Bank of Canada raised its benchmark rate from near 0% in early 2022 to 5% – a 22-year high – by mid-2023. This aggressive hiking campaign sent mortgage rates (for both variable and fixed loans) sharply higher, adding hundreds or even thousands of dollars to monthly payments. The result was a massive correction in the market: home sales plunged nearly 40%, reaching their lowest level in over a decade by fall 2022 as buyers were priced out.
Higher rates have severely eroded affordability. By late 2022, the share of household income needed to carry an average home hit an all-time high of 62.8%, according to RBC’s affordability index. This was the worst level on record since tracking began in 1986, illustrating how difficult it has become to finance a home purchase. Mortgage stress tests – which require buyers to qualify at rates ~2% above actual – further limit buying power when rates are elevated. Many prospective buyers can no longer qualify for the mortgage amount they need, or they’ve had to scale back their budget significantly. In short, borrowing costs spiked, affordability plunged, and demand dropped as fewer people could afford to buy. This interest rate shock is a key reason for the current slowdown in sales.
Economic Uncertainty and Consumer Sentiment
Broader economic uncertainty has made both buyers and sellers more cautious. With inflation high and interest rates rising, Canadians have grown worried about the risk of a recession and their future finances. Nearly half of Canadians expect a recession in the near term and this dampened consumer confidence throughout 2022 and 2023. Big purchases like homes are highly sentiment-driven – when people are uneasy about the economy or job security, they tend to wait on the sidelines rather than commit to a mortgage.
Recession fears and talk of a housing “correction” have led many buyers to adopt a wait-and-see approach. Some are concerned that home prices might fall further, or that buying now could be risky if the economy weakens. Others are struggling with higher costs of living (from food to gas), which impacts their ability to save for down payments or service a loan. On the seller side, those who don’t urgently need to move may hold off listing if they feel market conditions are unfavourable. Overall, consumer sentiment turned cautious, and that lack of confidence contributed to the drop in housing demand.
Inventory Levels: Sellers Holding Back vs. Oversupply
One critical question is whether the slow market is due to too much supply or not enough demand. In this cycle, sellers have largely been holding back. New listings have declined as many homeowners choose not to sell in a downbeat market. In 2023, the number of homes listed for sale in many Ontario markets was significantly below the previous year – overall new listings were about 7.7% lower than in 2022. Typically, when sales slow, inventory builds up, but here we’ve seen the opposite: would-be sellers are waiting on the sidelines, hoping for better market conditions (often the anticipated busy spring market). This restraint by sellers has prevented a major oversupply.
The balance between supply and demand has shifted – buyers have more choice now than during the peak, but many sellers are still sitting on the fence. With sales down and fewer new listings coming to market, total inventory has not skyrocketed into a glut. The ratio of sales to new listings in Canada tightened back toward a balanced market at the end of 2023. Months of inventory (the time to sell current listings at the current pace) stood at about 3.8 months nationally in late 2023, which is below the long-term average of 5 months. This indicates that while demand is soft, we are not seeing a flood of unsold homes – it’s more of a stalemate. Sellers with low-rate mortgages are hesitant to give them up, and those who don’t get the price they want often de-list rather than oversupply the market.
Pricing Trends and Buyer Activity
Home prices in Southern Ontario have seen a whiplash effect: a surge during 2020–early 2022, then a correction through late 2022 into 2023. At the peak, prices were climbing over 20% year-over-year in many markets, but the Bank of Canada’s rate hikes quickly put an end to that. By the end of 2022, property values were down about 13% nationally from their February 2022 peak, with declines exceeding 20% in some Ontario markets like Hamilton, Kitchener-Waterloo, London, and others. Even Toronto saw prices fall roughly 14% from the top – the sharpest drop on record for the MLS Home Price Index. This marked a significant shift from the red-hot bidding wars of the previous year.
The price correction, however, has been a double-edged sword for demand. On one hand, lower prices improved affordability on paper, which could entice some bargain-seeking buyers back. On the other hand, the drop in prices made many buyers cautious, fearing they might “catch a falling knife” if values fell further. Through 2023, prices largely stabilized at a level about 15-20% below the peak in much of Southern Ontario. The national benchmark price even ticked up slightly (+0.7% year-over-year) by December 2023, indicating the worst of the price declines was over. But because higher interest costs negate much of these price reductions, many buyers are still stretched. The stand-off in late 2022 and early 2023 – with sellers reluctant to cut prices further and buyers hoping for deals – led to low sales activity. It wasn’t until some sellers adjusted their expectations (and priced more realistically) that deals started happening again. Buyers today have a bit more negotiating power than during the frenzy, but well-priced homes will still sell since inventory isn’t excessive.
Government Regulations Affecting Real Estate
Several government and regulatory measures have also shaped the market, mostly by tempering demand. These policies include:
Mortgage Stress Test: All buyers must qualify at a rate ~2% above their actual mortgage rate. With today’s higher rates, this test significantly reduces the maximum loan many buyers can get, effectively removing some buyers from the market or lowering their price range. While the stress test improves financial stability, it does curb purchasing power during periods of rising rates.
Foreign Buyer Ban: In January 2023, Canada implemented a two-year ban on foreign buyers purchasing residential property (now extended to 2027). The intent was to cool competition and make housing more accessible to Canadians. In practice, the ban eliminated a segment of demand (mostly in high-end urban markets), but foreign buyers were a small fraction of the market. A recent analysis found the ban “had virtually no impact on prices or inventory”, though it did lead to reduced demand in certain luxury segments. The main takeaway for clients is that domestic factors – not foreign money – are the primary drivers of market trends right now.
Provincial Taxes and Rules: Ontario had already imposed a 20% Non-Resident Speculation Tax on home purchases by foreign buyers province-wide (since March 2022), further deterring non-resident investment. Additionally, some cities (like Toronto and Ottawa) introduced vacant home taxes to discourage investors from leaving properties empty. These measures aim to increase supply or reduce speculative demand, but their impact on overall market demand has been modest.
Anti-Flipping and Assignment Rules: The federal government introduced an anti-flipping tax (starting in 2023, profits on homes held less than 12 months are fully taxed as business income) to curb speculative flipping. Regulations around pre-construction assignments were tightened so that GST/HST applies, removing some quick-profit incentives. These changes, along with rent controls on some units, have cooled investor enthusiasm compared to the peak, thereby slightly reducing non-resident and investor-driven demand in the resale market.
In summary, government interventions have mostly targeted the demand side (reducing the number of buyers or the credit available) to stop the runaway price growth of previous years. While these policies have helped prevent excessive risk-taking, they also contribute to the slower sales environment. Agents should be aware of these rules as talking points – for example, explaining to sellers why there are fewer foreign buyers, or to buyers why their mortgage approval might be lower than expected due to the stress test.
Demographic Shifts Influencing Buyers and Sellers
Demographics are longer-term influences but are still affecting current market behaviour. One major trend is the generational hand-off of housing. Baby Boomers (roughly ages 60 and up) still own a large share of homes – about 41% of Canadian homeowners as of 2021 – and many are staying in their houses longer than previous generations did. Rather than downsizing en masse, some boomers are aging in place or postponing selling, which means fewer listings of established family homes hitting the market. When they do sell, it’s often to downsize or move into rentals or retirement living, but this is happening gradually. Their decisions affect inventory: if boomers hold off selling, supply remains tight; when they decide to sell, it can boost listings in certain locales.
On the buy side, Millennials and Gen Z are the up-and-coming force. Millennials (now late 20s to early 40s) have recently overtaken boomers as the largest group of homebuyers in many regions. In Ontario, about 54% of those shopping for new homes are millennials – a testament to their growing presence in the market. This cohort is in their prime family-forming and homebuying years, which underpins housing demand. However, they also face the brunt of the affordability challenge (high student debts, later start in accumulating wealth, and now high house prices/interest rates). Many young buyers are adjusting their expectations: some are purchasing condos or townhomes instead of detached houses, others are moving farther out of major cities in search of affordable options, and quite a few are relying on family help or co-buying with partners to make ownership possible. These shifts in buyer behaviour are a response to the market’s high costs.
Immigration is another demographic factor that bolsters housing demand, especially in Southern Ontario. Canada is welcoming record numbers of newcomers (over 400,000 per year recently), and a significant portion settled in Ontario. While most immigrants rent initially, within a few years many look to purchase homes as they establish themselves. Strong population growth, as RBC Economics notes, will “eventually heat things up” in the housing market. This means there is a latent demand pressure building, even if it’s not fully realized at the moment due to economic constraints.
Lastly, lifestyle changes post-pandemic have influenced who is buying and where. The pandemic drove some urban dwellers to seek larger homes in suburban or rural parts of Southern Ontario (thanks to remote work), causing secondary markets (Niagara, London, Windsor, etc.) to boom in 2020-2021. Now, with workplaces adopting hybrid models, that trend has moderated – but it has permanently expanded the pool of buyers considering smaller cities or towns. Meanwhile, the investor segment of buyers (people buying rental properties or flips) has pulled back because high financing costs and slower price growth make real estate investing less immediately lucrative than before. This retreat of investors (who were very active in 2021) has reduced competitive bidding, which is a relief for regular homebuyers.
Young buyers may need creative strategies (such as co-ownership or looking at different locales), while older sellers might need guidance on timing the market if they are downsizing. The key point is that demand isn’t gone forever – it’s being held back by temporary factors. The fundamental need for housing from growing families and newcomers remains, which sets the stage for a future rebound.
What’s Next: Outlook Based on Current Trends
Looking ahead, most experts anticipate that the current lull in demand will give way to a gradual recovery in the next 12-24 months. Interest rates are expected to stabilize and possibly start inching down by late 2024 if inflation continues to cool. The Bank of Canada has signalled that once price pressures are under control, it could begin easing rates from their peak. Any relief on mortgage rates will directly improve affordability, enabling more buyers to qualify and borrow larger amounts. Even a small decrease in rates can stimulate activity, as pent-up buyers who have been waiting may re-enter the market.
Major real estate organizations forecast an uptick in sales as early as 2024. The Canadian Real Estate Association (CREA) projects home sales will rebound by about 10% in 2024 and a further ~7% in 2025, as compared to the weak 2023 levels. In Southern Ontario, we can expect a busier market than last year, though not a return to the mania of 2021. Prices are likely to remain relatively flat in the immediate term, with any growth being modest. Higher borrowing costs will continue to cap how fast prices can rise, especially through 2023 and into early 2024. However, as demand picks up and if inventory stays limited, there could be mild upward pressure on prices in late 2024 and 2025. Essentially, the market may shift from the current buyer’s market tilt back toward balanced conditions.
Several factors could influence the exact timing and strength of the recovery. If the economy avoids a severe recession – so far employment has been resilient – consumer confidence will improve, and more buyers will step forward. Strong immigration and population growth in Ontario will steadily add underlying demand, as thousands of new households form and need a place to live. On the flip side, if inflation proves sticky and interest rates stay high longer than expected, the recovery in sales could be delayed. Additionally, an influx of new listings could occur if some homeowners decide to sell once conditions seem better (or if those with mortgages coming up for renewal feel pressure). This could be positive, creating more choices for buyers and more transactions overall, but it might temper price increases.
Actionable insights for agents and clients: In the current climate, realtors should prepare buyers and sellers for a more measured market. Financially ready buyers can take advantage of the low competition now – they might negotiate a better price or conditions, something unheard of during the peak. For sellers, it’s important to price accurately and be patient, as the pool of buyers is smaller; making a home show well and perhaps being open to conditions will help secure a deal in a slower market. Both parties should keep an eye on interest rate announcements, as those will be key turning points. If rates start to come down, we can expect a surge of buyers trying to get in before prices respond.
Overall, Southern Ontario’s housing slowdown is best viewed as a cyclical cooling off after an unsustainably hot market. The combination of high rates and cautious sentiment has pressed “pause” on many buyers, but it hasn’t erased their long-term need or desire for homes. As affordability gradually improves and confidence returns, demand should rebound. Real estate agents can reassure clients that the current low is not permanent – markets move in cycles, and based on forecasts, a moderate recovery is on the horizon. Being informed about the key factors (rates, economy, supply, policy, and demographics) allows agents and clients alike to make clear-eyed decisions in this transitional market.
Sources:
Royal Bank of Canada Economics – Housing Market Update (Jan 2022)
Canadian Real Estate Association – Market Statistics (2023)
Reuters – Canadian Housing Market Coverage
Storeys Real Estate News – Housing Affordability Analysis
Zoocasa/CREA – 2023 Housing Market Trends
Bank of Canada – Consumer Survey Highlights
Mortgage Professionals Canada – Policy Impact Analysis
Tarion/Ontario New Home Buyer Survey – Demographics
RBC Economics – Market Outlook Commentary
