According to a recent report from Fraser Institute, an independent, non-partisan, Canadian public policy think-tank, economic growth in Ontario is largely supported by the Toronto housing market.
“Toronto’s hot housing market is the one leg propping up Ontario’s otherwise weak and vulnerable economy, making the spectre of a possible housing bubble burst or even just a slowdown all the more worrying,” says Philip Cross, former chief economic analyst for Statistics Canada and author of Ontario’s One Cylinder Economy: Housing in Toronto and Weak Business Investment.
Homebuilding costs and record high prices accounted for nearly 30% of Ontario’s economic growth in 2016. In the first quarter of 2017, housing starts in Ontario hit a record high of 85,000, and 60% of the starts were in the Greater Toronto Area (GTA).
So, why is Ontario’s economy so dependent on the Toronto housing market? Because of the weak level of business investment. According to the report, firms plan to invest just $50.9 billion in Ontario this year. That might sound like a lot, but it’s actually lower than the pre-recession peak of $53.8 billion in 2008.
What’s discouraging business investment in Ontario? There are three main factors; high electricity costs, high labour costs, and high taxes. Basically, it’s expensive to operate a business in Ontario.
For electricity, it typically costs $80 per megawatt-hour, which is 40% higher than Quebec. And apparently, provincial hydro policy mistakes between 2006 and 2014 cost the population $37 billion.
When it comes to labour costs, Ontario has the highest in the country, outside of Atlantic Canada. Plus, it was just announced that the minimum wage would be increased to $15 by 2019. This October, the minimum wage will go up to $11.60 from $11.40 an hour. In January 2018, it will jump to $14, and then $15 in 2019.
The bid to raise the minimum wage is actually going to the public this week for input. A letter was sent to Premier Kathleen Wynne from the Ontario Chamber of Commerce, Restaurants Canada and the Canadian Franchise Association, saying that "Many Ontario employers, especially small businesses, are now considering closing their business because they do not have the capacity to successfully manage such reforms.”
As for the high taxes, Ontario has the second highest marginal personal income tax rate in North America at 53.5%. The corporate income tax rate is better, but is still “18th highest out of 44 jurisdictions in developed countries.”
“The entire provincial economy is so reliant on Toronto’s housing market for growth, that a cooling off—or worse, a burst—would be felt across Ontario, not just in the GTA,” Cross says.
With resale listings on the rise and some real estate consumers taking a “wait and see” approach with the province’s Fair Housing Plan, there’s no denying that the Toronto housing market is taking a breather. But, there is strong evidence that demand for new housing is still strong is certain areas of the GTA.
We don’t foresee a burst, but hopefully businesses and homebuyers remain confident in Ontario. After all, 40% of the top 50 places to live in Canada are in our province!