‘When you have weak supply responses…prices have nowhere to go but up’

The Canada Mortgage and Housing Corporation (CMHC) released a new study, Examining Escalating House Prices in Large Canadian Metropolitan Centres.

According to their findings, strong economic and population growth along with low mortgage rates were primary drivers in price growth.

The study used market data from 2010 to 2016 for Toronto, Vancouver, Montreal, Calgary, and Edmonton to analyze price growth trends.

A highlight of the study was that the supply response was weaker in Toronto and Vancouver. The funny thing is that the study doesn’t even take 2017 into consideration, and the Greater Toronto Area (GTA) housing inventory hit record lows last year.

“While it is true that the supply response in Toronto and Vancouver has been significantly weaker than in other Canadian metropolitan areas, we do not fully know why this is the case,” says Evan Siddall, President and Chief Executive Officer, CMHC. “There continues to be data gaps and we need to work more closely with jurisdictions at all levels to fully understand what is happening.”

Without actually diving into any hard data, we’d say it’s kind of obvious why Toronto and Vancouver lack in supply. Demand is strong, it takes years for new development applications to be approved, and population is increasing dramatically on an annual basis. Why population is increasing at a rapid rate is up for speculation and the issues with the applications process vary depending on who you ask.  

Vancouver

“Large Canadian centres like Toronto and Vancouver are increasingly behaving like world-class cities,” says Aled ab Iorwerth, Deputy Chief Economist, CMHC. “Their strong local economies and historically low interest rates make them attractive to both people and industry which drives up demand for housing.”

“When you have weak supply responses, as you do in these markets, prices have nowhere to go but up,” he adds. “Alleviating these pressures lies in finding ways to increase supply and that is a shared job for jurisdictions at all levels.”

In Toronto, the average home price increased 40% from 2010 to 2016, and 40% of this increase was impacted by conventional economic factors, like income and mortgage rates.

Unsurprisingly, price growth for detached homes was stronger than other housing types, and supply response was stronger for condos. Also, investor demand for condos increased significantly.  

This is the first time the CMHC has performed a study of this nature, and it doesn’t take into consideration the record high prices and record low supply we saw in Toronto in 2017, but it kind of explains it. Now that CMHC has the methodology down, it will be interesting to see what drives price growth with the new mortgage rates and Fair Housing Plan rolling out in Ontario.