Ontarians on the Move, 2021 Edition. #9— The simple explanation is that population growth caused Ontario real-estate prices to boom before the pandemic. Here’s the more complex answer.

Ninth in (what I hope) will be a series on population growth, migration, and what’s going on with Ontario’s housing market. Previous piece: Ontarians on the Move, 2021 Edition. #8 — Rents skyrocketed across Ontario as the population of young people increased

TL;DR version: In the four years of 2016–19, Ontario’s population growth was double historic averages, thanks to an influx of international students and visa workers. During that time period, the price of a single-family home rose by 80% in London, 73% in Tillsonburg, 70% in Niagara, 68% in Cambridge, 66% in Woodstock, and 64% in Kitchener. And that was before the pandemic-induced real-estate boom. Rising home prices and unusually high population growth are not unrelated, though the causal mechanism is a bit complicated.

Let’s summarize the story so far, from the eight parts of the Ontarians on the Move series, along with the short version and the focus on London. We’ll provide some additional data on the way as well.

Three important caveats to get out of the way:

First, this story and this series are about the pre-pandemic run-up in real-estate prices. The dynamics driving the 30%+ price growth we’ve seen in some markets during the pandemic are due to entirely different factors. What we’ve experienced since March 2020 is due to a combination of ridiculously low-interest rates and white-collar professionals with too much savings in their hands buying up everything from Bitcoin to retro video games to vintage hockey cards to housing, causing the prices of all these to absolutely skyrocket. Is anyone interested in buying a Steve Yzerman rookie card? Call me.

Second, this piece (and a few others in the series) is about the fact that housing, particularly in the GTA, didn’t keep up with population growth, which caused Ontarians to scatter across the province due to drive until you qualify and the musical chairs effect. It doesn’t get to the why not enough housing was built. I’ll leave that to others with more experience to get into.

Third, this piece looks at the role population growth and a lack of housing played in the increase in home prices. It’s not arguing that it is the only factor, though I believe it to be the primary one. There are other potential factors at play here, from the short-term rental market to housing being used for money laundering.

For most of the 21st century, Ontario had been growing by roughly 100,000 people per year. This suddenly changed in 2016, when population growth suddenly doubled, to over 200,000 persons per year:

Source: Ontario Ministry of Finance

Zooming in, we see the rise in population growth begins in early 2016 and continues through the start of the pandemic:

Source: Statistics Canada Table 17–10–0009–01

This increase in population growth was not from a baby boom, but rather from international sources. The growth was partly due to new immigration targets under both Prime Ministers Harper and Trudeau, but the big growth came from “non-permanent” residents — international students and visa workers.

Refer to: Ontarians on the Move, 2021 Edition. The Short Version

And this isn’t the type of population growth, like families going from one child to two children, which doesn’t necessitate adding to the housing stock. Rather it’s an influx of talented people in their 20s and 30s, looking for a place to live and start a family:

Refer to: Ontarians on the Move, 2021 Edition. The Short Version

The estimated number of families in the province grew considerably. Between 2010 and 2015, Ontario’s estimated number of families grew by less than 23,000 per year. In 2017, the province added over 50,000 families; in 2018 it added almost 70,000 in a single year.

Source: Statistics Canada Table 17–10–0061–01

Despite this population growth, housing starts hadn’t increased all that much after 2016, staying well below the levels of the 1970s and 1980s:

Source: Statcan Table 34–10–0135–01

A closer view. Between the four years from the start of 2016 to the end of 2019, Ontario added almost 230,000 people to its population each year, over twice as many as in the four period that proceeded it. Despite this doubling, the number of housing units was only 9% greater in that 2016–19 period than in the four years that proceeded it:

Source: Statcan Table 34–10–0135–01

Or, to put it differently, while population growth was 465,000 persons higher in 2016–19 relative to 2012–15 in Ontario, the number of units completed rose by only 21,000, or one unit of housing for every 22 people.

The number of family housing units should grow one-to-one with the growth in the number of families. This isn’t a particularly novel thought — for example, there’s a great Parliamentary Budget Office report on housing and family formation. Reading through a few of these reports, I do wonder if policy-makers missed the growth in family formations in 2015–19 simply because they aren’t used to paying too much attention to the growth in non-permanent residents.

You have more families form, you’re going to need more housing. But what was built in Ontario was largely apartments/condos, which is not too surprising given an influx of young people into the province and an aging population. The building of single-detached homes stayed well under the levels seen before the financial crisis:

Source: Statcan Table 34–10–0135–01

This combination of high population growth and low housing starts caused a tight housing market, causing home prices in markets like London, Ontario that had historically seen modest price growth, experience sudden price escalation.

Source: CREA.

The tight housing market across Southern Ontario had two causes. One was the direct effect of an increase in the number of non-permanent residents to London (and Woodstock and Brantford), etc. However, the primary drivers were the indirect drive until you qualify and musical chairs effects. As the Toronto (and area) housing markets became tight and started experiencing price increases, young families searching for housing were forced to get in the car and move to a city that they could afford. That drove up prices in those secondary markets, causing local young families there to get in the car and move to an even further market that they could afford. Housing market tightness and prices propagated throughout southern Ontario like a wave, starting from the CN Tower and reaching as far away as Windsor.

The driver of those price increases does not appear to be mortgage rates, which were not substantially different in 2015–19 than they were in the first half of the decade. In fact, they started to rise in 2017–18 (again, that date will be important later):

Source: Ratehub

The narrative that we’ve laid out has a number of testable hypotheses. If the story we’ve presented is true, then our data should show the following:

1. Prices should start to rise around the time, or slightly after, population growth rates rise. That is, around 2016 or so.
2. The drive until you qualify and musical chairs effects suggest that the further away from Toronto a market is, the later price escalations should begin.
3. Prices should consistently rise with population growth, with the increased housing starts and mortgage rates of 2017–18 taking some pressure off.

That’s a decent summary of what actually happened from 2015–19, but not a great one. The price growth was bumpier than #3 would predict, suggesting the story requires some additional complexity.

The Canadian Real Estate Association has a fantastic publicly available data set of home prices, going back to January 2005 (and at the time writing ending in February 2021). It includes average prices for single-family homes, one-story homes, two-story homes, townhouses, and, for some markets, apartments, along with a composite index.

I grabbed the data for single-family homes in all 25 Ontario communities where data is available. Here’s the evolution of prices between 2005 and 2012:

The sorting of the communities will become clear in a moment. Cells highlighted in red are years in which the community saw average home prices rise by less than $5,000 that year. Cells highlighted in green are years that saw home price growth of $50,000 or more. Outside of a house price boom around Toronto during the recovery from the financial crisis, there’s not much green on this chart.

Next, here is house price growth since February 2012, with the communities sorted in the same order:

This piece is explicitly not about rocketing home values across the province during the pandemic but… look at those rocketing home values across the province during the pandemic! The lowest increase, in North Bay, is still over $70,000 in a single year. Oakville Milton is up $264,600! In a single year! Completely bananas.

There’s quite a bit in here that supports the idea that population growth around the GTA, along with a lack of housing build in the GTA caused home prices to shoot up across southern Ontario thanks to drive until you qualify and the musical chairs effect. Specifically:

• Home prices started rising right around the time the population started growing. Feb 2016–17 and Feb 2019–20 were banner years for real estate.
• The home price rises appear to start in the Toronto area first then spread across the province. Our sorting of communities above is by largest prices increases during Feb 2016–17.
• Places near Toronto saw home prices grow much faster than places not near Toronto. Until 2019, Ottawa did not see the level of home price growth that places like Woodstock, Ingersoll and Tillsonburg did.

On the last point, here’s the date (after Jan. 2016) when each community first experienced 20 percent year-over-year price growth:

In the eleven years prior to Jan 2016, only two communities experienced brief periods of 20% year-over-year price growth: Oakville Milton in 2010 and Bancroft in 2015.

The 20% figure is completely arbitrary and the correlation isn’t exact, but it certainly looks like places further away from Toronto experienced price growth later.

But there’s one problem with this story — what on earth happened between 2017–18? Since the population growth was steadily high during 2016–19, you would think home prices would steadily increase as well. In some markets, like London, that was certainly true! But others, like Mississauga and Oakville Milton, experienced sizable crashes.

So how can we reconcile this geographically limited 2017–18 bubble with the population growth+housing shortage+drive until you qualify story? I’ve done a lot of reading of pieces from this time and they don’t give great answers. Most missed that prices didn’t go down in most of Ontario and others predicted that prices would be depressed for some time (when, in fact, they recovered quite quickly. If you ever want to make a prediction that will look embarrassing in a few years, forecasting the real estate market is a great way to do it). It’s strange that housing is such a large part of our economy, yet we spend such limited resources on studying it.

Here’s my best guess on what happened, based on what I’ve read and the many, many conversations I’ve had with realtors over the past few years. I really want to stress that this is not based on in-depth research, but rather just an informed guess. If there’s good research out there, please send it my way. Here’s my guess:

1. Housing prices started going up, particularly in the Toronto area, as the population started to rise.
2. Seeing these home price rises, more families wanted to buy right away due to fear of missing out (FOMO), and investors (speculators) got in on the action, smelling potential windfall gains. This caused those prices, which had already been rising, to go stratospheric. Without those investors/speculators/FOMO types, the price rises would have been more consistent and steady.
3. A number of regulatory changes at the federal and provincial levels caused the Toronto market to seize up, particularly for homes priced over $1,000,000. This, along with rising mortgage rates, took the wind out of the sails of the Toronto market.
4. However, taking the boots to investors and speculators did not eliminate the supply shortage, but rather just punted it down the 401, causing prices to rise in markets like Woodstock and London.

On the fourth point, note the big increases in home prices in mid-to-late 2018 in London and Tillsonburg. Cooling off the Toronto market created pent-up demand that spilled-over to the rest of the province.

This post has gone on far too long already. As such, I’ll leave you with the following summary:

• Home prices in Southern Ontario started rising right around the time the population started growing in 2016, thanks to an increase in international students and visa workers. Feb 2016–17 and Feb 2019–20 were banner years for real estate.
• The home price rises appear to start in the Toronto area first then spread across Southern Ontario. Our sorting of communities above is by largest prices increases during Feb 2016–17.
• Places near Toronto saw home prices grow much faster than places not near Toronto. Until 2019, Ottawa did not see the level of home price growth that places like Woodstock, Ingersoll and Tillsonburg did. The home price increases were in places within 200km of the C.N. Tower.
• There was a sharp increase in home prices in the Toronto area in 2016, which rose faster than population growth would suggest. This is likely due to investors/speculators/FOMO types noticing a tight housing market and trying to capitalize.
• The policies put in place to stomp down price growth in Toronto worked, but only for a little bit, and caused demand to spill over to the rest of the province.
• Home prices have gotten really stupid during the pandemic, for the same reasons stocks, Bitcoin, and old hockey cards have.

Would love your thoughts. Leave a comment or find me on Twitter!