Mark Blinch/Reuters

Canadian home prices just saw the largest 12-month increase in a decade amid the ongoing housing boom in Toronto.

The annual rate of national house price inflation climbed to 13.0% year-over-year in January, up from the prior month's reading of 12.3%, according to the latest Teranet-National Bank Composite House Price Index released earlier this week.

Toronto, specifically, saw its annual rate of house price inflation climb to 20.9% YoY, up from 19.7%. Moreover, Hamilton, an area near Toronto, saw home prices spike by 17.6% YoY as buyers were "shut out of the expensive Toronto market."

Some have argued that the drive-up in prices is due to first-time buyers trying to jump into a decreasing supply of homes.

However, in a recent note to clients, David Madani, Senior Canada Economist at Capital Economics, argued that that line of thinking is a "red herring." Rather, he believes, the price hike is being driven by move-up buyers leveraging the equity in their existing homes.

Capital Economics"... first-time home buyers aren't the ones driving the biggest gains in Toronto house prices, based on the simple logic that they simply don't have high enough incomes to afford them, by any mortgage lenders standard," he wrote in a note to clients. "The truth is that it’s mainly being driven by move-up buyers leveraging the equity in their existing homes."

His team "guesses" that first-time buyers only made up about 20% of Toronto's home sales.

"Since these move-up home buyers obviously already live in a home and are largely responsible for the big increases in house prices, it stands to reason that there isn’t a major shortage of housing causing housing prices to escalate," he continued. "Investors are the other reason for rising house prices. There are always shortages of housing for people wanting to buy their third, fourth or tenth property!"

Notably, recently released data from Statistics Canada show that Toronto has over 99,000 homes that are not regularly occupied, totaling about 4.5% of the city's supply.

Those watching the Toronto housing market have articulated similar arguments to that of Madani in the past. Mike Crawley from CBC News previously reported in November 2016 that analysts have noted that the "home-grown source of the surge in demand [is due to] investors who are buying houses not as a place to live, but as a place to grow their money."

Investor interest is bringing "thousands of new buyers to the market who otherwise would not have been there," John Pasalis, president of the real estate brokerage Realosophy, told CBC News at the time. "It basically is adding a significant number of offers on every property and is driving up house prices as a result."

As we have warned before, investment mania is the root cause of the escalation in house price gains, and this appears to be the case among homeowners and investors in Toronto, Madani added in the conclusion of his note. This activity often creates the illusion of shortages when bubbles are inflating, even when there is evidence to the contrary of a booming housing construction industry.

"Let's drop the pretense," Douglas Porter, the chief economist at BMO Capital Markets, wrote in a commentary in mid-February, according to CBC News. "The Toronto market — and the many cities surrounding it — are in a housing bubble."

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