What Is Driving Up Home Prices in Toronto in 2021?

The Toronto housing market has experienced a rapid price surge throughout the Coronavirus pandemic. Average sale prices have increased by 15% in the past year and the average sale price in Toronto is now over $1 million. That is great news for existing homeowners! Toronto’s real estate prices have risen even more during one of the largest economic crises in history. The primary reason home prices have been increasing is there has been a surge in demand for mortgages and home purchases. Real estate prices are a result of supply and demand and with such a large increase in demand, home prices exploded. But why are Toronto real estate prices increasing so much?

Low Mortgage Rates

Everyone in the real estate industry is talking about today’s low mortgage rates. In fact, at 1.55%-2.24% for five-year fixed rate mortgages, they are the lowest they’ve been in 50 years. It’s no wonder that people are rushing to get mortgages. Anytime mortgage rates are low, the cost of financing a home purchase becomes cheaper, so real estate investments become much more profitable. However, potential investors need to understand exactly why mortgage rates are so low.



The Bank of Canada (BoC) is a Crown corporation that operates as Canada’s central bank. BoC influences interest and mortgage rates through monetary policy, which includes setting the benchmark rate (or overnight rate). In March 2020, BoC significantly lowered the benchmark rate by 1.5 percentage points to .25% to stimulate the economy. The benchmark rate is the interest rate that banks use when exchanging money with each other. This interest rate affects the mortgage rates that home buyers get and with a low overnight rate, banks lend money for much less.

Another tool that BoC has at its disposal is buying government bonds. As part of its Provincial Bond Purchase Program, BoC has been purchasing government bonds since May 2020 and will continue to purchase bonds until May 2021. By purchasing government bonds, BoC raises bond prices and Canada’s money supply increases. By making money more plentiful, the price of borrowing decreases, and consequently, interest and mortgage rates decrease.

A good way to predict where fixed mortgage rates are headed is to use the Canada 5-year bond yield. It is a very standard way to track the effect of BoC’s actions and economic factors on interest rates.

Inflation and Investments

There are several ways to invest your money, but savings accounts and high-interest rate accounts are no longer a good option. With low interest rates, investors are worried about inflation having a larger effect on savings than interest rates. Even with low inflation, the extremely low interest rates mean a savings account is one of the worst investments you can make. By holding cash or having a savings account, your buying power or the real value of your money could actually decrease. People would much rather invest in something that gives them returns.

Real estate is an investment that has shown high returns throughout the pandemic. The stock market has shown even higher returns, but some people prefer low-risk investments. The real estate market is much less volatile and its returns have endured throughout the pandemic. This makes it a suitable investment for people who want a stable return.

As real estate prices continue to rise, the realized returns make investing in real estate even more attractive. The low returns of savings accounts, the high returns of real estate, and the low cost of mortgages all contribute to higher demand for real estate.

The Future of Toronto Real Estate

Home prices in Toronto will likely continue to rise considerably for a while longer. The overnight rate will likely stay at .25% until 2023 when inflation rates are expected to return to normal, which means that interest rates should continue to remain low. Even though bond yields have recently spiked, 5-year bond yields have remained below 1%. As BoC continues to buy bonds until at least May 2021, bond yields should stay low. Both of these factors point towards Toronto mortgage rates staying low for the next couple of months at minimum, which will keep real estate demand high.

Likewise, savings account interest rates will remain low, which encourage investors to pursue more attractive investments like real estate and stocks. Nobody can perfectly forecast exactly where real estate prices are headed. Real estate pessimists are worried that the real estate surge is supported by government debt and temporary monetary policy. This could indicate a housing bubble, especially in Toronto with Canada’s highest real estate prices. Real estate optimists think that even if the Toronto housing market is a bubble, it will not pop anytime soon and home prices will continue to surge. It is difficult to accurately predict the future but as it stands, Toronto home prices will continue to rise for the near future.

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