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Between Canada’s two most expensive cities, Vancouver has always outranked Toronto by a mile when it comes to home prices. Now, new data shows that the two markets are neck-and-neck, reporting the smallest home price gap in more than 30 years.

A report published by TD Economics economist Rishi Sondhi today states that as of December 2021, the price of an average home in Toronto was only four per cent less than the average property in Vancouver.

Ontario’s capital is not only vying for the title as the most expensive city in Canada, but the price gap between Toronto and Vancouver has narrowed to the tightest level since 1991. This underscores a “multi-year trend” where Toronto’s home price growth has outpaced Vancouver.

Policy measures helped GTA home prices catch up

Sondhi points to a number of influences that have caused prices in the two major cities to grow closer.

For one, government restrictions in the Greater Vancouver Area have been a “big factor,” in shrinking the price gap in recent years. The imposition of a 15 per cent foreign buyers tax in the GVA during August 2016, which coincided with “runaway strength,” in the Greater Toronto Area market, led to a “temporary price convergence” in both markets during 2016 and 2017.

A year later, GVA home prices took another hit thanks to more affordable housing policies, such as a hike to the foreign buyers tax and increases to land transfer and school rates on expensive homes. Meanwhile, Sondhi notes that there was a lighter touch to restrictions in the GTA.

As a result, the GTA has seen home prices rise 40 per cent since the end of 2018, while the GVA has reported only a 13 per cent gain on property values during the same timeline.

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“These policy measures have generally targeted the higher-end of the GVA housing market, likely impeding sales growth in higher-valued homes,” explained Sondhi in the report. “This, in turn, would have weighed on average home prices, given the shifting composition towards sales of more moderately priced dwellings.”

Sondhi also pointed out that the sale of homes valued at $2 million or more in the GVA dropped 10 per cent in 2019 before increasing in 2020 and 2021. Although data gaps prevent “a true comparison,” between the GVA and GTA, the sales of GTA homes valued over $1 million have jumped 200 per cent since the end of 2018, which is more than 120 per cent recorded for the same home category in the GVA.

Supply growth, new listings, impacting price growth

Heading into 2019, policy measures also left the GVA housing markets “extremely oversupplied,” relative to demand, Sondhi said.

“Markets have generally remained comparatively loose in the GVA since then, muting home price growth,” said Sondhi. “This gap has recently narrowed however, as GVA sales have outperformed. Both markets have benefitted from robust pandemic demand, but Vancouver has also been boosted by recovery from the restriction-driven slowdown in 2018.”

Chart: TD Economics

From 2019 to 2021, new listings in the GVA grew 16 per cent versus six per cent in the GTA. When it comes to new homes, the quantity of completions in Toronto fell in 2019 and have yet to return to 2018 levels. Meanwhile, completions have increased in the GVA on average between 2019 and 2021, “suggesting some more supply relief has come in Vancouver.”

“It remains clear that robust price growth in Toronto has not stimulated a meaningful increase in supply,” said Sondhi. “In fact, potential sellers who would be more active in ‘normal’ times may be holding back their listings due to a dearth of inventory to relocate to, and intense competition for available properties.”

Rate increases and home prices to influence price gap in 2022

Looking at early data, Sondhi suggests that the price gap between Vancouver and Toronto could continue to narrow as home prices in the GTA were up 30 per cent on a three-month annualized basis versus 23 per cent in the GVA.

Ahead of the four interest rate hikes that TD Economics anticipates in 2022, this environment could cause lower homes and drop the sales-to-new listings ratio by the end of the year, Sondhi predicts.

Following price increases of 18 per cent and 12 per cent in 2021, the GTA and GVA could see lesser gains of nine per cent and five per cent this year. On a quarterly basis, however, “modest and similar price growth profiles” are expected for both regions against tough affordability conditions, which would keep the price gap as-is. Lags in construction completion will bring “modest relief” for new supply as housing starts cools but remain above long-term averages in 2022.

Investor demand will also be an important factor to watch in the price gap, given that investors make up a slightly higher portion of the GTA market (24 per cent) in comparison to the GVA (20 per cent).

“Investors are likely more sensitive to rising interest rates, meaning that the higher rates that we are expecting could put outsized downward pressure on sales and prices in the GTA, thus widening the price gap between the two jurisdictions this year,” explains Sondhi.

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