Supply, Demand, and Southern Ontario’s Housing Market

As always, here is the TL;DR.

TL; DR Starting in 2016, Southern Ontario’s real-estate market caught fire, as population growth skyrocketed, but we saw only modest growth in new home construction, mostly in small-town Ontario. Then the pandemic happened, interest rates collapsed and white-collar savings exploded, causing money to be both cheap and plentiful. Money is gasoline, and it got thrown by the bucket-load on the already raging real-estate fire.

Any given week, I give 1–3 presentations on housing-related issues. Mostly to municipal governments, but also to federal and provincial policymakers, real estate associations, chambers of commerce, homebuilders, etc. You name a group, I’ve probably talked to them.

If you have seen any of my work, you know I love charts. My reports and presentations are full of them. Of all the charts in all my presentations, this one is my favourite. It shows the yearly price increase of a home in the London-St. Thomas market. Think of it as how much a house “earned” in a 12-month period.

Source: CREA

From 2005 to March 2016, the price of a single-family home in London-St. Thomas went up by about $6,000 a year. This was an era of relative price stability, though not one of economic stability. During the 2008–09 economic downturn, mortgage rates absolutely crashed:

5-year fixed vs. variable mortgage rates from 2006 — today

Source: Ratehub

With interest rates crashing, why didn’t we see prices go up in London-St. Thomas? Simple answer: The economy wasn’t doing great and the population wasn’t growing. We had something that looked like a balanced market. In 2008–09 itself, it was a buyer’s market. Existing homeowners wanted to sell, but the pool of buyers was relatively modest. Lower interest rates did allow homebuyers to place larger bids on homes, but they didn’t need to. They could win by making roughly the same bids they had before the crash, so buyers simply pocketed the savings from lower rates. The real-estate market wasn’t on fire, and the interest rate savings went to the buyers.

Southwestern Ontario’s real-estate market started breaking in 2016. My reports tell a straight-forward story of why:

I need to write more on that last point. Here are a couple of spoilers from an upcoming piece. Using data from the CMHC, I categorized every municipality by its population size in 2010, from over 500,000 people to under 25,000. The table below shows the number of housing completions over the last 12 years, dividing into a pre-population boom era (2010–15) and the population boom era (2016–21). Almost all of the increase in housing completions occurred in municipalities with less than 100,000 people.

Source: CMHC

The year-by-year increases for the smallest-sized communities is particularly revealing:

Source: CMHC

In short, what happened from 2016 to the start of the pandemic was that our population boomed, our rate of housing completions was virtually unchanged in Ontario’s big cities, went up in our small towns (but not enough to keep up with provincial population growth). This was the beginning of southern Ontario’s real-estate fire. And it was a big one.

High prices naturally receive the bulk of the attention, but this real-estate fire had some other large consequences, such as:

There is a lot of debate on Twitter on whether this was a demand-side issue (too many families) or a supply-side issue (not enough homes to support a growing population). That gets into the classic question of which blade in a pair of scissors does the cutting. I find that using Econ 101 (Marshallian) terms to describe the real-estate market does more to muddy the discussion than clarify it. I think it’s more useful to get more specific about the dynamics happening on the ground level.

Then the pandemic happened

Ontario’s population has not grown all that much during the pandemic, yet as shown by the first graph, real-estate prices in London-St. Thomas have absolutely skyrocketed. Home prices have increased by as much as $200,000 in a single year. What the heck is going on?

Simple answer: Money is gasoline, and it got thrown by the bucket-load on the already raging real-estate fire.

The global (and Canadian) interest-rate collapse receives the most attention, as it should. It has allowed buyers to place larger bids on homes. But we should not overlook the savings glut accumulated by the roughly 30% of the population who have done well financially during the pandemic. These mostly white-collar workers have been able to work from home and have seen no dip in their income. But they’re not spending money like they used to. They’re not taking vacations. They’re not commuting, so they don’t need to buy a new car. They’d like to buy a new dishwasher, but they can’t, because they’re all stuck on some cargo ship off the coast of Long Beach. So those white-collar workers are taking that savings and plowing it into the real estate market, sometimes because they want a second home where they have more space, sometimes because they read Rich Dad Poor Dad in college and they believe buying real estate is the path to financial independence.

We have had two periods in the last 15 years where money has been cheap and plentiful: the post-financial crisis era starting in 2009, and the pandemic. But they’ve had very different impacts on the London-St. Thomas real estate market. Back in 2009, there was no real-estate fire, so pouring gasoline (money) around did nothing, and all the benefits of lower interest rates went to the buyers. However, in the pandemic era, gasoline was thrown on an already raging real-estate fire, so we had a scene that looked like something out of a Michael Bay movie, and sellers, rather than buyers, received the lower-interest-rate windfall.

It also explains why markets that were hot before the pandemic, such as London-St. Thomas have seen massive price increases during the last two years, while others like Regina and St. John’s, which were not, have experienced only modest price appreciation.

Source: CREA

So what happens when interest rates go up and we stop pouring gasoline on the London-St. Thomas real-estate fire? Making real-estate price predictions is about the fastest way to look foolish, so I’ll refrain from doing so. We do know that price pressures may ease. They may ease to the point at which prices go down. They could even crash.

My concern is that if prices do fall as we stop pouring gasoline on the fire, policymakers will think “Mission Accomplished” and the problems are over. But the fire isn’t going anywhere. There are still too few homes for too many families. We’re still losing farmland at an alarming rate in Ontario, as new construction is increasingly happening in smaller communities. The population of children in Toronto will continue to fall.

We ignore southern Ontario’s real-estate fire at our peril. We cannot turn our backs on it, even if prices fall.



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Mike Moffatt

Senior Director, Smart Prosperity. Assistant Prof, Ivey Business School. Exhausted but happy Dad of 2 wonderful kids with autism. I used to do other stuff.