It costs a lot more to buy a home in Toronto or Vancouver than it did in 2010. While some of the increase is relatively easy to explain, a lack of data makes it difficult to gauge how other factors, such as speculation, have driven up house prices in Canada.
A new study by Canada Mortgage and Housing Corp. looked at the period from 2010 to 2016, during which house prices in Vancouver rose by 48 per cent and in Toronto by 40 per cent. It determined that about 75 per cent of the increase in Vancouver could be attributed to conventional economic factors — including mortgage interest rates that were near historic lows, higher disposable incomes and population growth. But in Toronto, those factors only accounted for 40 per cent of the increase, says the report.
“We investigated the data for additional key factors that could explain the elevated activity levels,” says the report. “We found that there had been a shift in the distribution of sales toward high-end homes, with almost all growth in house prices for these properties coming from more expensive, single-detached units. This suggests that looking at different points in the income distribution is just as important as studying how income levels evolve across the distribution.”
The highest-paying jobs are in the largest cities. Toronto is the financial services capital of Canada and both Toronto and Vancouver have many well-paying jobs in the advanced technology and health care fields.
“Businesses located their workforces where they can access pools of talent — in major metropolitan centres. Consequently, disposal income among some groups is rising more rapidly in certain cities,” says the CMHC report. “These trends reinforce the role of larger cities in attracting highly educated professionals from both other parts of Canada and abroad, thereby providing even a further boost to the demand for housing.”
How much did investor and speculative activity drive up house prices? Perhaps not as much as many think, and investors are probably helping boost the supply of available homes, says the report.
“If the number of housing starts is much higher than the rate of household formation, we argue that this difference was likely financed by investors,” says the report. It says rising home prices attract small-scale rental investors, including individuals who rent out part of their homes to help them with their mortgage payments. “It is also possible that many of these investors have effectively generated demand for builders and developers to construct more housing. In this regard, investors could be effectively encouraging more supply rather than increasing demand.”
The controversial issue of foreign investment is “a persistent challenge” because of a lack of data, although Statistics Canada and CMHC have increased their efforts to track foreign buying activity. A recent report from Statistics Canada found that non-residents own 3.4 per cent of residential properties in Toronto and 4.9 per cent in Vancouver.
“While official data on the stock and flow of foreign investment appear low, it is possible that upsurges of foreign investment at market peaks could alter expectations of domestic homebuyers on the price they should pay for housing, and encourage domestic speculators,” says the report. A CMHC survey found that 52 per cent of recent homebuyers in Toronto and Vancouver believed that foreign buyers were having an influence on home prices.
Both B.C. and Ontario have introduced taxes on non-resident real estate buyers.
For years, the development and real estate industries have said that government policies that limit the supply of developable land, along with land-use policies and “not in my backyard” movements, have made it impossible for the industry to keep up with demand. That means that more affordable low-rise housing such as townhomes, semi-detached homes and multiplexes, are not being built.
“We found that supply responses to price increases in Toronto and Vancouver were proportionately weaker than the response in other cities, which is consistent with corresponding regulation and geographic characteristics,” says CMHC.
The study says many Vancouver homes are demolished and replaced with more expensive ones that house the same number of people. “There also appears to be a sizable price gap when moving from two- to three-bedroom homes, suggesting there is a shortage of three-bedroom homes. We do not have data for Toronto on this issue, but we suspect this is happening there as well.”
The study calls for the densification of cities. “Densification, however, needs to increase the supply of all types of housing. Preserving enclaves of single-detached housing will likely only serve to increase wealth inequity and not meet the housing needs of a growing population. It is particularly imperative that the process of redeveloping land within the borders of Canadian cities occur efficiently and promote change in the form of local neighbourhoods. While many Canadians fear density, we found evidence that high-density communities can be made in low-rise structures through partnerships between developers and local communities and government.”
It cites examples such as the redevelopment of Humbertown shopping plaza in Toronto and the Oakridge Shopping Centre in Vancouver. In both cases, old 1950s-style, car-dependent shopping centres will be replaced with mixed-use residential, retail and community uses.
CMHC says there are several key “data and analytical gaps in housing that restrict our ability to predict housing market forces and anticipate changing needs.” It has pledged to work with all levels of government to try to share more information and “better understand the underlying factors that limit housing supply in high-priced markets, and support more timely and flexible ways to respond to those challenges.”
