The Spillover Effect

The Spillover Effect

Most Hamiltonians are acutely aware how hot our city’s real estate market has become. Home prices in
individual neighbourhoods and regions across the city are regularly increasing by as much as 15% per year. In
more high-demand areas, such as the city’s north end, from James to Wentworth, prices rose by over 34%
between 2015 and 2016. In the St. Clair, Blakely, and Delta neighbourhoods, the average sale price of a home
has reached nearly $370,000. These figures, while intimidating (especially so to first-time buyers), leave out an
important question of the effects of externalities on the Hamilton market. We in the real estate industry often
talk about the effects (both positive and negative) of Torontonians moving to Hamilton and setting up shop or
home here, but up until very recently, those effects have not been quantified.

The Regional Context

According to the Canada Mortgage and Housing Corporation (CMHC), as single-family prices rise in the GTA
(due to favourable economic conditions, population growth, and low mortgage rates), prospective buyers are
being forced to look to external CMAs (Census Metropolitan Area), increasing prices in those centres as well.
This in turn causes buyers from these areas to look into purchasing further from the GTA, and so and so forth,
created this spillover effect. The CMHC analyzed the recent explosion in house prices (that which has been
going on since the 2008-2009 recession) and found that the current climb is the highest seen since the 1990s,
as well as being disproportionately high compared to other Ontario CMAs. They also found that the GTA prices
are out of balance with the current GHTA economy, meaning there is a growing disparity between what people
make as income and what houses cost. This will be extremely important to remember later on. Possibly the
most eyebrow-raising finding, and the one that we’ll be focusing on in this editorial, is the “spillover” effect the
GTA market has had on Hamilton prices. They found that, as Toronto prices increase, so too do Hamilton’s.
Not only did they glean this relationship, they quantified it. They found that, if say GTA prices increase by 10%
in one quarter, Hamilton prices would increase by 14% the following year. However, were Toronto prices to
drop by 10% in one quarter, Hamilton prices would drop 14% accordingly. This spillover is apparently affecting
markets as far-removed from the GTA as Ottawa and even Sudbury. This correlation is also very evident in
CMAs such as Guelph, Brantford, Kitchener, and Barrie.

Hamilton’s Connection

In October 2016, CMHC’s Housing Market Assessment detected substantial evidence that the GTA is currently
experiencing a period of overvaluation, caused in part by the previously mentioned outpacing of house price
relative to income-based demographic indicators. They suggested that such an imbalance can only be
corrected by stronger wages or lower prices. As can be seen in the chart above, price correlations and
spillover effects tend to be stronger closer to the GTA. Hamilton is no exception. While many of these
correlations and relationships have remained constant and strong over time, some of them have shifted since
the 2009 recession.

As can be seen above, while the relationships in price between Hamilton, Guelph, Barrie, and the GTA remain
strong, others have shifted substantially, the most noteworthy being St. Catharines. Yet the correlation
between Hamilton and the GTA remains strong. As mentioned above, a one percent shock in house prices
(positive or negative) would lead to a 1.4% change in Hamilton within one year. After three years, that effect
would grow to approximately 2%. This is in contrast to the growth relationship the GTA has with Barrie, which
would experience a shift of 1.4% within a year, but would have a slightly weaker effect after three years than in
Hamilton at 1.8%.

According to CMHC, only Hamilton’s house price increases have kept up with GTA price increases since the
2009 recession, “such that the price of a home in Hamilton relative to the price of a home in GTA has remained
fairly constant over time.” For other CMAs, the gap has been growing. If GTA prices continue to grow as they
have been, that gap can only get wider, and Toronto prices will become even more unattainable to the average
buyer. That being said, because Hamilton’s growth is keeping pace with that of the GTA, it’s important to get
into the market as soon as possible, before you are priced out!

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