Why have London, ON home prices been on fire since 2016? POPULATION GROWTH

Not really part of my Ontarians on the Move series, but explores many of the same themes.

TL;DR London, ON home prices were surging in the five years prior to the pandemic. The reason is simple — unexpected population growth in Ontario, primarily from international non-permanent residents (which include workers on visas and international students).

Between 2004–08, home prices rose about $50,000 in my hometown of London, Ontario. They rose another $50,000 between 2008–15. Two periods, each of about five years in length, where home prices rose $50,000.

After that, things explode. In 2016, 2017, 2018, and 2019, home prices rose by $50,000 every single year. A $200,000 rise in just four years.

Source: CREA. I don’t have the raw data for this graph; if anyone does could they send it to me? Greatly appreciated.

Why was 2015–20 (pre-pandemic) so different than prior years? The short answer: population growth.

Source: Statistics Canada.

That’s your answer. It wasn’t greedy investors or the Bank of Canada or “too many condos, not enough single-family houses”. Those can all be factors, of course; interest rates, in particular, have been driving a lot of the pandemic-era surge in real estate prices. But none of that explains why 2015–20 was so different than previous years. Greed wasn’t suddenly invented in 2015, and mortgage rates started going up around 2017, yet home prices continued to climb. In short, those factors don’t explain why home prices surged in 2015–20 and not some other five-year period.

Source: Ratehub

If “population growth” is the answer to our question “Why did home prices start to rise in London, ON in 2015?”, we’re now left with the question “Why did the population in London, ON start growing in 2015?”

Fortunately, that question is mostly answered in the piece: Ontarians on the Move, 2021 Edition. The Short Version. It was not just London that saw a rapid rise in population growth rates in 2015; this was happening across southern Ontario.

Source: Statistics Canada.

The province did not anticipate this level of growth. Government forecasts from 2015 had anticipated population growth of closer to 700,000 people over five years. Population growth in 2017, 2018, and 2019 each exceeded the most optimistic of government forecasts.

This unanticipated population growth fundamentally altered how and where Ontarians work and live.

The population growth was mostly driven by two factors. The secondary factor was a rise in immigration. The primary factor was a rise in the number of international non-permanent residents, such as people on work visas and international students.

Source: Statistics Canada.

The Toronto area experienced much of the increase in immigration and non-permanent residents. Despite this, housing builds barely changed at all. The Toronto metro area was either unable or unwilling to build housing stock fast enough to keep up with population growth.

Sources: Population growth from this Statistics Canada table, housing starts from this Statistics Canada table.

The influx of new residents pushed up housing prices (for both owner-occupied and rental properties). The lack of housing (and high prices) caused Torontians to move to other parts of the province in greater numbers, which we call “interprovincial migration”:

Source: Statistics Canada.

This phenomenon, called , saw communities within driving distance of metro Toronto, like Kitchener and Brantford, surge in population and experience their own housing price boom. Often local residents of Kitchener and Brantford became priced out of their own markets, and had to drive further away from those cities to find somewhere they can afford to live, known as the .

How did this play out in London?

All forms of population growth were higher in London, ON between 2015–20 relative to 2010–15:

Source: Statistics Canada.

London experienced a nearly eight-fold increase in the number of net non-permanent residents in 2015–2020 relative to 2010–15. Net immigration was up 80%, and the number of net intraprovincial migrants nearly doubled, thanks to and . Other sources of population growth also increased; a fair bit of this can be explained by former London residents, who had been working in Alberta, moving back to the city after oil prices crashed.

Using the year 2015 as the split points between the two periods was not chosen arbitrarily; there really was an abrupt shift in population growth trends around 2015–16, as shown by the yearly growth of international non-permanent residents.

We had an international student boom all across the province. Many of those students ended up at Western and Fanshawe. Others ended up in the GTA. And the province didn’t prepare for any of it, pushing real estate prices up across Southern Ontario.

This population boom affected all price points of housing. Tragically, we saw big increases in the waitlist for social housing starting in 2017:

Source: Financial Accountability Office of Ontario.

It’s a straight-foward story of supply and demand. There were more families looking for housing than there were places available, which led to bidding wars:

From April 17, 2017

Causing prices to rise. It all comes down to population growth, , and .

But What About COVID-era Price Spikes?

The pandemic really did change everything, at least temporarily. Unlike 2015-March 2020, unplanned population growth is a factor in the huge spike in home prices we’ve seen over the last few months. There are six megatrends that I believe are relevant to the Ontarians on the Move story:

  1. A slowdown in the growth of international students and people on work visas in the province.
  2. A collapse of the tourism market.
  3. A huge increase in the savings-rate of white-collar professionals due to a collapse in spending.
  4. A big increase in work-from-home
  5. A big increase in shop-from-home
  6. Global interest rates falling to near zero (and in some cases, below zero).

The first two trends have taken some of the pressure off of the rental market. The demand for those properties is not as high as we would have predicted pre-COVID, and a collapse in tourism has caused some properties used for Airbnb to flow back into the rental stock.

The final four megatrends have thrown gasoline on regional housing markets. White-collar professionals have found themselves with a lot more money, which is flowing into everything from stocks to retro games to hockey cards.

White-collar professionals with a whole lot of savings are pushing up prices on a wide range of assets.

That increase in savings is allowing home buyers to make even larger downpayments and increase the size of their offers.

What will things look like post-COVID

It depends on what happens to our six mega-trends:

  1. A slowdown in the growth of international students and people on work visas in the province.
  2. A collapse of the tourism market.
  3. A huge increase in the savings-rate of white-collar professionals due to a collapse in spending.
  4. A big increase in work-from-home
  5. A big increase in shop-from-home
  6. Global interest rates falling to near zero (and in some cases, below zero).

It is straight-forward to make both bearish and bullish cases for non-Toronto real-estate markets.

The bearish case is that if (or as most people say . I say ) interest rates rise substantially and saving rates return back to traditional levels, the ability of families to make large offers will fall, and house prices will return to something resembling their pre-COVID levels.

But over the next five-to-ten years, I’d put population growth, particularly the growth of non-permanent residents, as the primary driving factor. If Ontario continues to be an attractive destination for international talent, expect these pressures to continue. On the other hand, if students and workers become less interested in the province (perhaps due to the Biden immigration reforms), then the and , that were so prominent in 2015–2020, will be substantially diminished for the rest of the decade.

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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.