For years, Vancouver has held the distinction of being home to the most expensive real estate in Canada. But Toronto has now closed that gap. Anthony Okolie speaks with Rishi Sondhi, Economist, TD Bank, about what that says about the country’s housing market.
- OK, let's start with the big picture. Rishi, in your latest report, you say that Toronto has narrowed the gap with Vancouver as the most expensive place to live in Canada. And the gap between the two cities is the smallest it's been in 30 years. Rishi, why is Toronto catching up now?
- Well, hi, Anthony. Yeah, so there's a few factors that underpin Toronto's catch-up. One of the main ones we think is the macroprudential measures that were implemented in the greater Vancouver area between 2016 and 2018. And what that did is it had the impact of sort of slowing activity in Vancouver's market, allowing supply to sort of be more in balance with demand. And as a result, prices haven't grown as quickly in Vancouver. Another feature of these measures that-- they targeted the higher end of Vancouver's market, which would disproportionately impact average prices. So that's one factor.
Another factor is that supply has been a little bit more responsive in Vancouver than it has been in Toronto. So the combination of these two things, the government measures to slow activity in Vancouver coupled with the fact that supply has been a little bit more responsive in Vancouver, has played a role in slowing average home price growth in Vancouver relative to Toronto.
- OK. So let's talk about interest rates. Because at the last policy meeting, the Bank of Canada defied expectations. They held the benchmark rate steady. But they did set the stage for hikes in the coming meetings. What impact could a rate hike have on the home price gap between Toronto and Vancouver going forward?
- Yeah. So as interest rates move higher, of course, what that's going to do is it's going to take some of the steam and some of the froth away from housing demand in both markets. So home price growth has been robust in both markets. Affordability has deteriorated in both markets quite significantly, but more so in Toronto. So as these higher interest rates hit, what is already a pretty poor affordability environment in both markets, that will obviously sort of weigh on demand and serve to cool home price growth, we think-- again, in both markets.
Now that said, a nuance here is that investor activity has been higher in Toronto than it has been in Vancouver. So investors are likely more sensitive to higher interest rates than other buyers are. So because there's a greater share of investors in Toronto, that could serve to weigh on demand even more so in Toronto and, therefore, widen the price gap between Vancouver and Toronto moving forward.
- Another trend that you identified in your report is this inter-provincial migration. What impact has a narrowing in the price gap had on migration flows from BC to Ontario?
- Well, we think, given that Toronto has closed the gap with Vancouver and Ontario, obviously has with BC as well-- that's obviously related-- what that's done, we think, is that it's narrowed an obstacle or removed, blunted an obstacle for people to move from Ontario to BC. So that's sort of helped in the record outflows that we've seen from Ontario to BC alongside BC's labor market running a little bit hotter than Ontario's.
These things have been enabled by the proliferation of remote work as well. So we think remote work in tandem with the closing in the home price gap has made it easier for people to move from Ontario to BC.
- OK. So given what we know, what's your outlook on home price growth this year for Toronto and Vancouver? And do you believe that this gap is going to persist? Or is it going to continue to narrow?
- Yeah. So we think that home price growth will slow this year as interest rates rise in both markets, slow quite significantly. Because affordability, again, has deteriorated quite significantly in both markets, and investor activities in play and the likes. We think that softer demand will weigh on home prices as well as markets, keep them slower.
We anticipate modest home price growth after sort of the near term, the very near term. We expect modest home price growth, particularly in the second half of this year in both markets. And we think that price growth will be similar in both markets moving forward. So that will keep the gap sort of as-is.
There is some risk that it narrows even further in the near-term. Because some of the shorter term metrics are pointing in Toronto's favor. So there are some risks of a near-term narrowing. But overall for 2022, we think that the gap will be quite narrow and persist to more or less as-is.
- Rishi, thank you very much for your time.
- Thanks, Anthony.