On Wednesday, September 27th, we had the privilege of attending a presentation given by Craig Alexander, the Senior Vice-President and Chief Economist at the Conference Board of Canada. For a bit more insight into the Conference Board and Mr. Alexander’s background, click here.
The subject of the presentation was ‘Understanding Ontario’s Real Estate Boom.’ We know that Canada and particularly, Vancouver and the Greater Golden Horseshoe (GGH) have experienced a significant increase in home prices over the past two decades and there has been no shortage of doomsayers predicting a crash. While these concerns are not surprising, Mr. Alexander says that one must understand the numbers, the underlying factors and so much more. He did say that recessions happen periodically and at those times, one might expect a short-term impact on prices. Rents have not increased at the same pace, but that has to do with regulatory controls.
So what were some of the factors that fueled price growth? It has been a combination of both economics and ‘structural’ issues. The historic low interest rates stimulated growth and made housing more affordable. These low rates combined with our low unemployment numbers and economic growth (we’re the fastest growing economy in the G7 in 2017) were some of the economic reasons that the stage was set for rising prices.
The two regional markets share a couple of ‘structural’ drivers in common. These are population growth driven through immigration and land scarcity. Immigrants do not spread themselves evenly across the country, but rather go to these larger centres with employment and cultural familiarity opportunities. Surrounded by mountains, divided by rivers and with few bridges, Vancouver’s land scarcity caused an increase in condominium developments. You cannot build out, so you build up. This drove up the price of single, detached family homes. Yet, Canadian culture is strongly tied to raising families in single, detached homes. In Ontario, the designated greenbelt surrounding the Greater Golden Horseshoe created this region’s land scarcity. The shortage of detached homes for sale created a price premium on these types of dwellings. The trigger for regulatory action was the narrowing gap between single family detached and condo prices. Incremental regulatory actions have been implemented since 2010 with a periodic cooling impact, although Mr. Alexander believes that the reaction is more psychological in nature. Further, Canadians are a conservative lot and our mortgage funding is significantly different than our US counterparts. (Most of our mortgages are structured as ‘full recourse’ loans, which makes walking away from one’s home less likely.)
So, while risks to the economy always exist (e.g., NAFTA renegotiation) and a cooling has already been effected, Mr. Alexander predicts that continued price growth in the detached home sale market is inevitable. Normal expected percentage growth should be the low-to-mid single digits going forward and is likely to be 1% or less in the coming year. Outside of Vancouver and the GGH, price increases have been more normal and this is what is likely for these two regions going forward.
For a full review of the presentation, click here –> Craig Alexander Presentation 2017-09