A key feature of housing markets in Canada over the last
decade is the sustained price increases particularly in larger urban
centers such as Vancouver and Toronto. Despite a relatively flat economy and stagnant population
growth, even northern Ontario has seen a price surge in its two largest urban
housing markets: Greater Sudbury and Thunder Bay. However, while Ontario’s housing price surge especially in the GTA shows little sign
of abating, it appears that economic reality may have finally caught up with
northern Ontario’s largest housing markets as prices appear set to level off.
Figure 1 presents data from Canada Mortgage and Housing
(CMHC) on average MLS housing prices for Greater Sudbury and Thunder Bay from
1990 to 2015 with forecasts for 2016 to 2018. The forecasts are the simple average of the high and low
prices forecast by CMHC. For much
of the 1990s, average house prices in Sudbury and Thunder Bay were on par. Starting in 2003, prices in
Sudbury begin to rise while in Thunder Bay it is not until about 2008 that prices
begin to take off. Prices in
Sudbury soar above those of Thunder Bay but by 2014 the gap pretty much
disappears and price increases in both cities appear to be leveling off as we
move beyond 2016.
In Sudbury, the average MLS housing price rises from
$108,596 in 1990 to reach $242,303 by 2015, an increase of 123 percent. In Thunder Bay over the same period,
the increase was from $100,607 to $234,692 for a percent increase of 133 percent. Meanwhile, for Ontario as a whole, the
increase was from $171,979 to $465,441 – a rise of 171 percent.
Figure 2 plots the Sudbury and Thunder Bay numbers alongside
those of Ontario and the comparison is striking. Housing prices in Ontario as a whole – driven of course by
the GTA – have always been higher than those in northern Ontario. The sustained increase in Ontario
starts approximately in 1996 – nearly a decade before the northern cities – and
is more steep. Moreover, while the
forecast increases show a slowdown in prices, they nevertheless are continuing
upwards, which does not appear to be the case for Sudbury and Thunder Bay.
Of course, the drivers of housing prices in Ontario are
fairly straightforward - income, interest rates, demographics. The economy and income growth in Ontario has seen its ups and downs since 1990. However, as Figure
3 shows, there has been an increase in population since 1990 of nearly 36
percent, which would invariably boost housing demand. More importantly, interest rates (the Bank of Canada Rate is plotted in the figure) have dropped to historic
lows, which make financing homes much easier even with the price
increases and low income growth. In the case of
northern Ontario, low interest rates are a factor driving demand and prices but
the demographics of the region are flat.
Indeed, the region’s population is also aging faster than the province
as a whole.
As a result, one can expect the surge in housing prices to
definitely moderate in the north.
Indeed, housing markets in Thunder Bay and Sudbury have probably been
quite fortunate to see the price increases they have. However, there is probably more to the picture than meets
the eye. One other factor has been responsible for rising prices in Ontario and
northern Ontario – and no, this is not a digression on foreign buyers. It remains that over the last decade,
the supply of new housing has become more constrained as a result of more regulation
of residential development. A
recent study has concluded that a factor in Canadian housing prices rising has
also been land-use regulation—approval timelines, timeline uncertainty,
municipal council and community impacts, costs and fees, and the prevalence of
rezoning. More regulated districts
tend to grow less.
For example, take a look at total housing starts in Sudbury
and Thunder Bay as illustrated in Figure 4. From peaks in the early 1990s, they both drop and stay quite
flat – more so in Thunder Bay than Sudbury.
Take a look at Figure 5 for Ontario. Starts there drop after the recession
of the early 1990s but then resume peaking circa 2003 and then fall again. True, some of these fluctuations in
housing starts are due to business cycle conditions. However, it remains that in Ontario the supply of new
housing-especially single detached homes - is probably not keeping up with demand surge as a result of increases in
population and low interest rates.
The drop in starts since 2003 is driven mainly by a drop in single-detached homes - condo starts have grown. In northern Ontario, the slowdown in addition to new housing stock has
been even more pronounced and dates back to the mid 1990s.
However, interest rates are as low as they are going to
go. Population growth and economic
growth in the north are flat. Even
with supply restrictions, it would appear the housing price boom in Sudbury and
Thunder Bay is over for the time being.