Photo: Reg Natarajan/Flickr
Low interest rates are playing the leading role in the fiery dramas that are unfolding in the Toronto and Vancouver housing markets, where home prices are rising at a frenetic double-digit pace annually, say leading economists in a new report.
But they also point the finger at a strong cast of supporting supply and demand factors.
“It seems that everyone has their favourite lead actor/villain driving these two markets skyward,” reads a new BMO report penned by Douglas Porter, the bank’s chief economist, and BMO Senior Economist Robert Kavcic.
“While record low borrowing costs are the most obvious factor behind lofty home prices, the fact that the surge in prices is so heavily concentrated in just two cities (and their environs) means that there are other important factors at play as well,” says the report, entitled “The Housing Market Blame Game.”
The latest figures from the Canadian Real Estate Association underpin the concentration the economists are referring to: Canadian homes sold for an average of $509,460 in May, but if you remove Greater Toronto and Greater Vancouver from the mix, that number falls to $375,532.
Below, BuzzBuzzHome News highlights some of the reasons Porter and Kavcic say these two markets have been white hot and why they think they will likely continue on a their blistering tears — unless government policy measures are enacted.
The demographic impact
“The underlying force for housing demand is household formation. If your population aged 22-44 is growing, you have it. If it’s not, home price inflation is not sustainable,” Stefane Marion, National Bank of Canada’s chief economist, argued earlier this year.
Now add two more voices, Porter and Kavcic, to the chorus: “Quite simply, the millennials have now more than filled the housing demand void that plagued the country and helped suppress home prices through the 1990s/early-2000s,” they write.
At the same time, baby boomers are not selling their detached homes en masse to free up equity as they reach retirement, leading to further supply constraints in the low-rise market at a time when older millennials look to settle down.
“While we’ve been sold stories of families holing up in condos to live a downtown lifestyle, backyards still rule for this age group,” say Kavcic and Porter, nodding to the 30-39-year-old set. “That said, this factor is probably close to peaking, with population growth in this segment projected to fade gradually by the end of the decade.”
More jobs (and the local economies that support them)
Some 25 per cent of jobs in Canada are now based in Toronto or Vancouver. The two urban centres haven’t been responsible for such a large share of overall Canadian employment in at least 15 years, according to BMO. Arguably, this puts more people in these cities in a position to buy a home. Either way, they’ve got to live somewhere.
“Note that there are roughly 250,000 more jobs in these two cities today than would be the case if they had maintained their average employment share of the 2001-11 period — that’s a strong marginal boost to housing demand,” say the economists.
And sweeter employment prospects in Toronto and Vancouver are attracting young workers from other parts of the country as the manufacturing and resource industries sag, notes BMO. As they arrive, housing demand ramps up.
Foreign real estate investment
Foreign investment has been a popular topic for market observers, particularly when looking at Vancouver housing, even in the face of a well documented lack of hard data on the trend. Nevertheless, BMO cites it as a “major factor” driving prices in Vancouver and Toronto, pointing to unofficial studies and first-hand accounts.
“While many downplay this factor (‘it’s only X% of the buyers!’), Economics 101 will tell you that the marginal buyer sets the price,” says the report. “If you introduce a wave of new buyers on an already tight market, prices will soon reach for the sky as the demand curve shifts even slightly to the right,” reads the report.
Recently, Kavcic told BuzzBuzzHome News that speculation was creeping up in Vancouver, citing increased home-flipping (the quick reselling of a house for a profit). He and Porter echo that line.
“Data on this front are sparse, but while the housing expansion has long been largely fundamentally driven, there is a creeping sense that, even in just the past 6-to-12 months, speculation is starting to pick up,” they say.
BMO says more properties are being resold within a 12-month window, but that isn’t the only indicator of speculation the BMO economists suss out.
“Also, the fact that condo prices in the city, which don’t share the same supply constraints as the detached market, are going parabolic [up 22 per cent year-over-year] suggests that price growth might be starting to reinforce itself,” they write.
Porter and Kavcic consider Toronto “a far milder case at this point,” though National Bank recently drew attention to stronger condo price gains in the city. Last month, Hogtown condo prices rose 7.8 per cent compared to May 2015, according to the latest Teranet-National Bank House Price Index, reportedly the most-rapid year-over-year growth since 2011.
Densification and the land restrictions that encourage it
Looking at all homes in Toronto and Vancouver, there is enough supply to meet current demand, says BMO. Thing is, these markets’ composition skews towards the high-rise segment, while demand for detached homes continues to pick up and supply lags.
“In fact, the stock of detached homes in Vancouver has hardly budged in two decades, and in Toronto, the number of single-detached units completed in 2015 was the lowest since 1979!” according to BMO. (Check out this BuzzBuzzHome graph for an in-depth look at this.)
As for the causes of this shift away from low-rise construction, BMO cites Vancouver’s geography, and provincial land-use policies impacting the Greater Toronto Area.
These policies include the Ontario Places to Grow Act, an initiative that includes plans to “curb sprawl,” and The Greenbelt Plan, which protects swaths of farmland and ecological sensitive areas — amounting to a region larger than Prince Edward Island — from development.