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The BMO report, though, questions the assumption that supply constraints are behind the rapid house price inflation in Canada.
The report points out that residential and non-residential real estate prices were moving in sync until 2015, when residential prices took off, reaching a 15-per-cent difference with non-residential real estate prices. If supply constraints were behind escalating housing prices, BMO argued, they should also have affected the non-residential real estate.
Supply-side constraints are acute for developable land in urban areas where most new residential developments occur in Canada. Non-residential construction, except for high-end office and retail development, often occurs in places where land supply is not scarce and where land prices constitute a smaller portion of development costs.
Hence, prices for residential real estate could have grown faster than non-residential real estate because of the former’s likely urban location.
Also, according to statistics by the Organisation for Economic Co-operation and Development, Canada is neither much more urban than the U.S., nor do Canadians live disproportionately in large populous cities.
It could be that the higher prices in Canada are essentially driven by the greater Toronto and Vancouver areas, where pockets of high-priced housing are numerous. A comparison of housing prices in Toronto and Vancouver with ones in Boston and San Francisco might suggest that the gap is much narrower than the one highlighted in the BMO report, Dunning opined.