Supply woes drive soaring home prices in Vancouver, Toronto: report

Home construction in Toronto and Vancouver failed to keep pace with surging demand between 2010 and 2016, leaving prices with “nowhere to go but up,” according to a new report from Canada’s federal housing agency.

Home prices soared 40 per cent in Toronto over the period examined and 48 per cent in Vancouver.

While conventional economic factors such as population growth, migration to cities and low mortgage rates were important drivers behind those increases — accounting for 75 per cent of the price jump in Vancouver and 40 per cent of the rise in Toronto — a “weak supply response” to surging demand was also a crucial factor, the report found.

“Large Canadian centres like Toronto and Vancouver are increasingly behaving like worldclass cities,” said Aled ab Iowerth, deputy chief economist at the CMHC. “When you have weak supply responses, as you do in these markets, prices have nowhere to go but up.”

Data gaps have prevented the federal housing agency from fully understanding what’s behind the supply shortfalls in Toronto and Vancouver or why they have grown so vast in comparison to Calgary, Montreal and Edmonton. Supply responses were stronger in each of the latter three cities and price increases were more modest.

“What seems to be happening in Calgary and Edmonton is when demand comes along, the cities are spreading horizontally, so there’s a bit of sprawl going on,” ab Iowerth said.

Montreal already has a large rental sector, a greater comfort living in denser housing, and more readiness to convert industrial land to other uses, he added.

In Toronto and Vancouver, a number of factors including the availability and price of land have prompted supply efforts to shift away from single detached houses and toward condominiums and more expensive high-end homes. These market forces have coincided with municipal and provincial policies encouraging increased housing density.

Though the objective is to combat urban sprawl, “densification … needs to increase the supply of all housing,” the report states.

The supply problems in Toronto and Vancouver are largely due to government policy interventions that focus on the demand side of the housing market equation, said Benjamin Tal, deputy chief economist at CIBC World Markets Inc.