Supply constraints and population growth are driving up home prices in Toronto and Vancouver, according to a Bank of Montreal economist, who’s warning against solely blaming foreign buyers for the surging price gains.
BMO Nesbitt Burns senior economist Robert Kavcic said a concentration of jobs and low interest rates are also behind soaring prices in the two red hot housing markets.
“It’s easy to blame the foreign-buyer boogeymen for the home price gains in Vancouver and Toronto,” he writes in a research note published on Thursday. "Sure, all anecdotes suggest they are playing a role in some neighbourhoods – we just don't know exactly how big that role is."
The latest numbers released by the Canadian Real Estate Association on Tuesday show the average sale price in greater Vancouver rose 32.3 per cent year-over-year to nearly $1.1 million, while in greater Toronto it climbed 14.2 per cent to $631,092.
Kavcic pointed to three "simple" factors at play behind the sky-high home prices in Toronto and Vancouver.
Kavcic notes that population growth in the 30-to-39 age group, which are typically first-time buyers or those upgrading from starter homes, is accelerating in the two bustling cities. Meanwhile, Toronto and Vancouver have accounted for 75 per cent of Canada's net job growth over the past two years.
Kavcic said supply-and-demand is also adding pressure to home prices in both cities.
"Vancouver's geography is well documented, but in Toronto, development restrictions contributed to 2015 seeing the lowest annual number of detached home completions in 37 years," he said.
Low interest rates
High demand and constrained supply conditions are playing out in a record-low interest rate environment, Kavcic notes.
"A five-year fixed mortgage is barely above the expected long-run inflation rate," he said. "The longer this lasts, the hotter these markets will burn."