Major drivers of price growth in red-hot markets

Recent official statements and regulatory changes have placed the spotlight on the major role of overseas investors in driving up Canadian real estate prices, but Bank of Montreal senior economist Robert Kavcic thinks that factors closer to home are at play.
Kavcic noted that while it’s easy to blame overseas capital for the exorbitant housing prices in high-demand, high-volume markets like Toronto and Vancouver, it is a sorely misguided assumption.
“Sure, all anecdotes suggest they are playing a role in some neighbourhoods — we just don’t know exactly how big that role is. What we do know is that the fundamentals right here are strong enough on their own to drive big price gains,” Kavcic told HuffPost Business Canada.
Among these drivers are the country’s mortgage rates, which are now at an historic low despite some hikes in large banks in the past few months.
“A five-year fixed mortgage is barely above the expected long-run inflation rate,” Kavcic observed. “The longer this lasts, the hotter these markets will burn.”
Another aspect to consider is the increased upward pressure on the Toronto and Vancouver housing sectors, brought about by a significant shift: More and more new owners are now in the 30-39 age group, while first-time buyers in the 25-34 bracket are getting increasingly rarer. Kavcic warned that while the present period is a boon for sellers and brokers, this situation is essentially a demographic time bomb that is set to hit housing markets hard starting 2018.
Most importantly, Kavcic pointed at the growing scarcity of space for new homes. In particular, the prevailing philosophy of building upward (not outward) in Vancouver, and the death of single-family homes in high-density Toronto, are stimulating intense consumer competition and price spikes in these areas.

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