Buying a house? London economist says you might want to wait
Influx of out-of-town buyers driving soaring house prices, economist Mike Moffatt says
A red-hot home sellers' market has been boiling in London, Ont., for years, according to economist Mike Moffatt.
Moffatt looked into the reasons behind the sustained growth as part his research as senior director of the Smart Prosperity Institute. Here's what he told CBC's Afternoon Drive host Chris dela Torre.
Q. As someone who's been watching housing prices across southern Ontario, why did you want to take a closer look at London?
I thought London was interesting to look at. We started seeing around 2015 or so house prices go up significantly, despite the fact that the economy, between about 2015 and 2018, wasn't particularly strong. But yet, we were seeing house prices go up 10, 15, 20 per cent a year. So it was a bit of a puzzle.
Q. What did you find out?
We found out that a lot of it has to do with population growth and this all happened pre-COVID. Around 2015, the population of Ontario started growing in ways the province didn't forecast. A lot of that was due to what we call non-permanent residents, so international residents who aren't immigrants, aren't Canadian citizens, but are still living in Ontario. This is foreign students, international workers on visas, some Syrian refugees.
What ended up happening across southern Ontario is that you saw an influx of people, either through international sources or because they wanted to move and get a larger house, and their local markets had become too expensive. So as the Toronto market got expensive, people started moving to Kitchener-Waterloo. When Kitchener-Waterloo got expensive, people started moving to Brantford. As Brantford got expensive, they started moving places like London. So you have this sort of domino effect that between 2015 and 2020, the further away you got from the CN Tower, over time, house prices would start to go up in those markets.
Q. If prices are largely tied to population growth trends, what do we know about how long this is going to continue?
In the COVID-environment, things have changed quite a bit. It's not population growth that's been driving the big increases we've seen in the last 12 months. Home prices across southwestern Ontario are up about 30 percent. The increase has been largely driven by very, very low interest rates. More families are also realizing they don't need to be in Toronto, so markets like London, Woodstock and Stratford are becoming more attractive.
It's hard to know what this is going to look like in a post-COVID environment. On the one hand, interest rates are probably going back up, so that should cool the market. But, on the other hand, the international students are probably coming back again, which could drive population growth. There's a lot of uncertainty right now about where housing prices are going to go over the next 12 to 24 months.
Q. I imagine it's perhaps too early to look at all the data from March 2020 until now, but do you suspect that It's quite a bit different from what we've seen in the previous five years?
Absolutely. The population has not been growing over the last year as it had in the past just because a lot of students haven't been in the country, but we've still seen home prices increase because of interest rates and so on. It's really hard to tell where things are going, but, even if we had a small correction, house prices are more than double what they were five years ago. This has caused real affordability issues for families.
Q. What should people looking to buy or sell be thinking about?
Well, there's certainly a risk that as interest rates go up and maybe foreign students don't come back to the same degree, there is the potential for a late 1980s-style housing crash. I would be very hesitant to make large housing investments in this market.
I know a lot of people have sort of a fear of missing out [and think] if they don't buy now, house prices will be even higher six months from now. But, you're taking a real risk, so unless you absolutely need to change where you're living, you might just be better off waiting this one out.
This interview has been edited for length and clarity.
With files from Afternoon Drive