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Why this infamous economist says supply is not the issue in Toronto and Vancouver

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Photo: City of Toronto/Flickr

David Madani, senior Canada economist for Capital Economics, suggests blaming supply constraints on surging Greater Toronto Area prices is bullish.

The real estate industry regularly links high home prices in the Greater Toronto Area to a supply shortage — here, and here, and here — but the contrarian economist doesn’t buy it.

“Housing bulls argue that the surge in house prices in recent years and the current strength of new home construction are justified by strong population growth in Canada, but the data suggest otherwise,” writes the latest weekly report edited by Madani.

A growing population fuels demand for housing and can lead to shortages if not enough new units are brought to market, resulting in skyrocketing values — a simple supply-and-demand argument.

SEE ALSO: Still convinced GTA home supply is the big issue? This economist’s got a question for you

But Capital Economics suggests this isn’t the case in Canada’s priciest markets. They aren’t seeing the fastest rates of population growth in the country, and those cities that are don’t have soaring home prices. “Population growth certainly can’t explain the massive regional disparity in home price gains,” says the report.

Toronto’s population has grown by an average of 1.6 per cent per year, according to Capital Economics, while Vancouver’s rose by 1.4 per cent annually. Meantime, more affordable Saskatoon and Calgary have seen their populations increase at roughly double the rate of those two cities, Canada’s most expensive housing markets.

“Accordingly, if home prices were going to increase dramatically somewhere in Canada in recent years, we would have expected those gains to show up in the prairies rather than Toronto,” the report reads.

But during that five-year period, home prices in Toronto vaulted 76 per cent, far exceeding Calgary’s gains of 14 per cent and Saskatoon’s uptick of 1.8 per cent.

“The bulls would still argue that Toronto and Vancouver are special cases because restrictions on building have limited growth in housing supply. But that conventional wisdom doesn’t stand up to scrutiny either,” the report continues.

Toronto builders have finished 0.39 units for each person the city’s population grows by. In Vancouver, contractors have been even busier, completing 0.52 homes per person added to the population. In Saskatoon and Calgary, where five-year population growth had been booming, fewer than 0.35 homes were completed per person added.

“The upshot is that the massive regional divergence in house price gains in recent years cannot be explained by under-building and tight supply in Toronto and Vancouver,” according to the report.

Ever the outlier, Capital Economics, which has been predicting a Canadian housing crash for the better part of this decade, has earned its share of critics.

“So tired of hearing, ‘it’s not supply and demand, it’s…” tweeted Ben Myers, senior VP of market research and analytics at Fortress Real Developments, a real estate development and finance company, along with a chart outlining what he says has pulled Toronto home prices higher.

He had presented the chart a day earlier at advocacy group Toronto Housing Matters’ Slow & Expensive event, which was focused on supply-related issues in the Greater Golden Horseshoe region, alongside Jane Pepino, a partner at real estate and business law firm Aird Berlis.

In the first half of this year, 19,500 new condos in the Greater Toronto Area sold, accounting for a whopping 92 per cent of the available units over that period, according to Myers.

“Essentially anything that’s coming on the market is selling,” Myers explained at Brightlane on King Street West yesterday evening.

Afterwards, Pepino outlined another factor contributing to a supply crunch.

“There’s no easy land any more,” she said, suggesting builders have to go through a more complicated and lengthy process of assembling multiple properties together to build on, even in places like Durham outside of the city proper. “All the easy land was built on 15 years ago,” she added.





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