Canada’s Rising Unemployment Squeezes Toronto Housing Market

Canada’s unemployment rate jumped to 6.1% in March 2024, the highest level since January 2022, according to the latest Statistics Canada report. This missed expectations of the rate of rising unemployment to only 5.9% and represented a significant increase from 5.8% in February. The spike was driven by an additional 60,000 people looking for work or on temporary layoff last month.

Rising unemployment poses risks for the Toronto housing market, which has already been cooling after a period of overheated activity during the pandemic. As more Canadians lose their jobs or face income insecurity, housing demand is expected to weaken further.

Causes of the Unemployment Increase

The 6.1% unemployment rate came despite employers adding a modest 2,200 jobs in March, following a gain of 40,700 in February.However, employment growth has been slowing while the labor force continues expanding rapidly, putting upward pressure on the jobless rate.

The slowing economy and high interest rates from the Bank of Canada’s aggressive tightening cycle are likely key factors restraining job creation. Youth aged 15-24 have been particularly impacted, with employment in that group declining by 28,000 and the youth jobless rate spiking to 12.6%.

Waning Housing Demand

Higher unemployment directly translates to lower demand for home purchases as people have less income and feel less secure about their job prospects. Research shows rising joblessness leads to lower expected future income and thus diminished ability and willingness to buy homes.

The Toronto Regional Real Estate Board has already noted some sellers pulling listings off the market due to lack of demand amid the deteriorating economic conditions. If the unemployment rate continues climbing, further price declines could be in store after the market’s 5.9% drop in 2023.

Rental Market Pressures

Rising unemployment is expected to particularly impact the rental market, as renters tend to have fewer savings to fall back on during job losses compared to homeowners. This could lead to higher rental vacancies and downward pressure on rents if significant job losses materialize across income levels.

However, in the near-term, rental demand may actually increase as some would-be homebuyers are forced to continue renting due to reduced budgets from higher interest rates and economic uncertainty.

Risk of Higher Delinquencies

An extended period of elevated unemployment raises the risk of higher mortgage delinquencies and foreclosures, as jobless homeowners struggle to keep paying their mortgages. Historical data shows job losses were the primary driver of missed mortgage payments among prime borrowers during the Great Recession.

While the current unemployment increase is still relatively contained, a more severe spike could put considerable strain on Canadian households, especially those that took on large mortgages when rates were lower.

Outlook and Market Balance

Most housing analysts expect the Toronto market to continue cooling in 2024 if the unemployment rate remains elevated, with potential for further moderate price declines. However, there is some optimism that the impact may be milder than past recessions if job losses can be limited in scope.

Ultimately, monitoring employment trends will be critical for insights into the direction of the housing market. A balanced market is expected for 2024, with the sales-to-new-listings ratio hovering around 50% based on current conditions. But a further deterioration in the job market could shift the balance more towards buyers.

The Bank of Canada will also be closely watching unemployment data ahead of its next interest rate decision on April 10th. While a pause is expected, any signs of intensifying economic weakness could put rate cuts back on the table later in 2024.