Fleeing Canada’s Large Cities Makes Less Sense As Suburban Prices Soar: BMO

Homebuyers fled big cities like Toronto during the pandemic, searching for suburban deals. Most of those deals are now gone, as small cities and rural Ontario saw prices soar. BMO senior economist Robert Kavcic argues this in his latest client research note.

The gap between buying in a big city like Toronto, and a small city is quickly closing. Pre-pandemic, it was near historic lows, providing huge value. Now the gap is closing fast, putting the ratio near historic levels. He feels this is a “permanent” change that will kill a lot of incentive to move to smaller surrounding cities.

The Gap Between Toronto Real Estate and Surrounding Markets Is Closing Fast

Small city prices have been rising a lot faster than big cities, and it is killing the incentive to move there. Kavcic uses single-family home prices in Barrie to illustrate his point. Pre-pandemic, those homes were 54% of the price of buying in Toronto. Now the ratio is 62%, losing 8 points of value, in just over a year.

He also points to a similar trend in London, Ontario. A single-family home in London was 45% of the price of buying a one in Toronto. Now with the migration to London, it’s 53% — closing the gap by a similar number of points.

“Both of those ratios are back in-line with, or above, the relative pricing that prevailed over a decade ago,” says Kavcic.

Smaller Real Estate Markets Were A Deal Pre-Pandemic, Compared To Historic Ratios

The economist has two big takeaways from this phenomenon. First, “a lot of the run-up in prices in smaller peripheral markets likely reflects a permanent relative repricing.” he said.

More bluntly, buyers missed a once-in-a-lifetime opportunity to nab a relative deal. Relative being an important term, because that doesn’t mean prices will stay where they are. They’re just expected to move more in line with big cities, maintaining a more regular gap. It took a big shock to lower the ratios, and an even bigger one to bring them back to historic levels.

As Small Cities Become More Expensive, It Makes Less Sense To Move

The second takeaway he leaves is the smaller the gap, the less value small cities provide. “…at some point, it doesn’t make as much sense from a relative value perspective to push that far out of the core, and that point might be nearing,” he said.

Though it is worth remembering, some people aren’t moving because they’re looking for value. Some are moving because a 30 point gap between the price of a house in Toronto and the suburbs is too large for many to afford. Even if the suburbs provide worse value, it may be all buyers can afford. Cities like Toronto and Vancouver are difficult to buy in, even if you really, really wanted to buy there.

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  • V 3 years ago

    So all you morons from Toronto coming to Whitby/ Oshawa and paying 100,000’s over asking will soon realize your mistake. Once rates go up and people can afford less you will find it hard to sell for what you paid.

    • Canaduh 3 years ago

      It’s really sad looking at the latest sold figures. Otherwise equivalent units in many suburbs are showing parallel universes: being sold either at / under (!) the asking price or severely over. The latter makes me think there is still a bidding war narrative still being pushed on some buyers while their peers up the street are paying much, much less. Dirty games being played at the moment.

    • Paul 3 years ago

      Those morons you are talking about are probably investors and corporations.

    • Vincent Fornelli 3 years ago

      Unless Oshawa is the next Mississauga. Even a pull back now would work out to a decent investment over time.

  • Pepp 3 years ago

    Ask yourselves which will retain more value over time:
    A: a nice house close to downtown core. with big lot, private backyard, close to transit highway and shopping.

    B: a house far away from city center, meaning you are off to one side of the city. So you are stuck to only one side of the city in terms of work opportunities. Requires hours of commute and not close to anything.

    There, thats why the suburbs (far away burbs) are a bubble. Core real estate and suburb real estate are two different markets. With near core real estate it gives you access to the whole city which lets you radiate out from the center. If you are off to a corner its nearly impossible to seek long term opportunities on the other side of the city.

    • Marcel Forster 3 years ago

      The city gets less attractive as it gets more uniform. People only pay so large of a premium to be located beside a bunch of chain stores.

      Bubbles also produce this homogenous and bland place. Toronto quickly went generic, and now the “cool” and “hip” stuff is all successful indy brands from Hamilton, now taking a shot at Toronto.

      That said, you’re also paying for infrastructure. I don’t know why some of these people choose to pay premiums for well water and septic tank.

    • JT 3 years ago

      That’s a loaded question because there are many factors to why someone would live near the core vs suburbs.

      For example, age of children. Schools and amenities for children and families (day care prices and spaces, rec centres, libraries, parks) in many cases are superior to what is offered in the city core.

      If your spouse works in the suburbs, it’s easier for one person to commute into the city then to do the reverse commute.

      Demographics and aging population, most millennials are reaching or are at the average child bearing age. Are they going to be able to pay an extremely high premium to live in one of the few good school districts in the city, or have more choice in a neighbourhood and type of home in the many good school districts outside of the city core?

      • Average Man 3 years ago

        Space for kids is a real concern, but that whole thing about “good” schools is such a borrowed American narrative. There are no bad schools in Toronto. Not really.

        Also, the city has way more rec centres, parks and libraries than the core.

  • Doi 3 years ago

    I used to think Oshawa had a lot of homeless, until I moved to Ottawa.

    Still, Oshawa tops all other cities when it comes to ratio of pickup trucks on the road. If you don’t drive a pickup in Oshwa, you are nothing.

    • D 3 years ago

      It’s the city of uncouth bumpkins burning gas when there’s better alternatives. It’s not like oshawites are farmers or hard workers.

      • Doi 3 years ago

        Their vehicle, their choice. The ratio is about same as the ratio of luxury import cars on the roads in Richmond hill/Markham. About one in every 3 vehicles.

  • Average Man 3 years ago

    People act like it’s an immutable law of nature that homes in the city are more expensive than those in the suburbs. Up until the late ’90s, you couldn’t give away houses in some neighbourhoods in Toronto.

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