Canada's Condominium Magazine
It is no secret that the real estate market has hit a rough patch, and it does not seem to be getting any better. Torontonians have been struggling with rising prices, and strict regulations have been passed by the government, making it even more difficult to purchase by limiting access to loans. The government has, however, found one answer to the growing question of why these prices are skyrocketing out of control.
The Canada Mortgage and Housing Corporation (CMHC) observed major urban markets to determine where prices were increasing and trends were developing. Surprisingly, the CMHC concluded that over half of Toronto’s real estate price increases cannot be explained. Rather than shifting the blame to any one organization or group, the agency followed a trend that revealed that prices were increasing in a way that is inconsistent with factors typically involved in rising costs.
The CMHC’s analysts developed a model, which was broken down into three major characteristics. These characteristics included personal disposable income, young adult population, and mortgage rates. These areas are those which are measurable and adjusted for inflation.
The Greater Toronto Area experienced soaring real estate prices prior to the run in 2017. Prices increased by 40.19 per cent from 2010 to 2016, with disposable income accounting for 5.04 of those points. Additionally, population growth represented 8.09 points, while mortgage rates accounted for 3.22 points. That leaves a whopping 23.84 points, or approximately 59 per cent, of price increases completely unexplained. All of this is prior to the 2017 increases, which reached 30 per cent at one point. The CMHC estimates that the compound annual growth should have been only 2.56 per cent year over year, less than half of the actual increase.
The unexplained gains were explained by the CMHC as unmeasurable demand side factors. These include factors such as shortage of supply, a perceived shortage of supply, and exuberance. The number of homes built exceeded the number of households that formed during the study period. However, a shortage of supply does not necessarily equate to a lack of housing. It merely means that housing was not available for everyone who wanted to purchase a home at the same time.
A large number of buyers hit the market looking for the ideal property. These include millennials searching for their first home, families desiring an upgrade, and urban land bankers looking to maximize yields. While millennials and families account for a more permanent demand, speculators and investors typically only last as long as the market accepts exuberance. Once this has died down, prices are relieved quite a bit and more closely reflect market norms.