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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