Brian O'Donoghue

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Canadian real estate prices are soaring, but the fastest growth is not coming from big cities. BMO chief economist Douglas Porter tells clients to really think hard about this growth. Home prices are now rising even faster than at the peak of the 1980’s real estate bubble. Most of that growth isn’t coming from emerging global hubs, but small towns. He asks investors to consider: Do all small towns have supply shortages? Or is the madness of the crowd taking over?


Canadian real estate prices are rising at a record rate, dismissing more supply and higher rates. Annual growth of the Canadian Real Estate Association (CREA) benchmark price reached 28% in January 2022, the “record” for the index. It’s not just a base-effect either, says the bank, with prices up 46.4% since January 2020. Most of this growth also isn’t occurring in larger cities, but small towns in the country.


Some of the wildest markets in the country are in smaller and medium-sized cities in Ontario. Not to pick on Brantford, but that fine city—previously known mostly as the home of Wayne Gretzky—has seen prices sky-rocket 86% in two short years.


A similar trend can be seen across Ontario’s “cottage country,” where prices rose the fastest. Places like Barrie, Welland, Tillsonburg, Woodstock, Chatham, and Guelph are further examples. These are all charming places that might be future global hubs at some point. However, they’re closing the gap between prices in Toronto so fast, they might be killing growth pre-maturely.


The CREA Home Price Index only goes back to the year 2000, so there might be questions about how it compares to the ‘80s bubble. For that, BMO has to use the average transaction price from land registries. But even on the somewhat more volatile average transaction price measure, where records go back to 1980, the two-year gain is also a record, at 48%.


In other words, the Canadian housing market has just seen bigger increases than ever witnessed through any two years of the great housing bubble of the late 1980s. Just as a reminder, that episode ultimately saw the overnight mortgage rate climb to 14% to suppress inflation and bring the market to heel. Prices then went into the wilderness for a decade.


If you think it’s different this time due to population growth, one should consider the pace in the 80s. At the height of the late-80s real estate bubble, population growth outpaced today’s recent cycle peak. In 1989, the population growth rate was more than a quarter larger than the 2018-2019 peak. It turns out immigrants stop moving to a place when the value proposition collapses. Shocking right?


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