Everyone in Canada will soon be able to afford a home. We just need investors to build more and rates to be cut, right? Anyone that can do basic math has probably been skeptical of that narrative and with good reason—even the people making those statements don’t believe it. Internal messages from the CMHC make very brief but important notes that challenge the exact narrative its leadership has been publicly spinning. More supply won’t bring down home prices, and lower rates won’t make them more affordable. Higher prices will make more supply feasible and lower rates will help boost prices.
CMHC Internal Chats Claim Higher Prices Will Improve Supply
The public is frequently told that housing is expensive because of a shortage. People will often say, “it’s simple supply and demand.” Messages shared between the agency’s communications staff and economists in 2021 show the circumstances are a little more complicated.
“Higher price level will improve development feasibility, so starts will remain elevated over the forecast horizon,” read a suggested point discussing a released forecast.
That’s right, an increase in supply is only viable with higher home prices. This has always been the case due to incentive and demand.
Incentive is straightforward—in a highly financialized housing market, it’s not about shelter. Development isn’t a charity, though some developers will masquerade as one for tax purposes. It’s a capital intensive, fairly high risk gamble. The wave of project failures that are currently happening, like the ones in Greater Toronto around 2018, resulted in significant losses for investors before any houses were actually delivered. A sufficient profit margin is required in order to attempt homebuilding or they might as well hit the Baccarat table.
Manageable input costs bring up the next important point—demand applies to all commodities, not just a finished product. A building boom means pressure on all inputs, especially for something we previously called the 3Ls—labor, land, and lumber.
That issue is further complicated by the fact that commodities are priced in US dollars and traded globally. Any decline in the currency means rising input costs for the developer, so a weak currency requires even higher prices. Global trade also means any sudden need for a commodity means bidding against other country’s competing for the same resources. Even if lumber comes from down the street, a buyer in another country may be willing to pay more, leading to higher costs or general shortages.
Central Banks Lower Rates To Raise Prices, Not Improve Affordabilty
Understanding how interest rates work also provides a little more context in this area. The Bank of Canada (BoC) is in charge of maintaining an ideal decay in the value of money (i.e. inflation). Their primary and most important tool to do this are interest rates.
When inflation is below the central bank target, interest rates are cut to stimulate borrowing. By stimulating borrowing, they’re allowing consumers to pull forward their purchases by using more of their future income for a purchase today.
The goal is to intentionally stimulate demand faster than supply, and drive the non-productive price growth better known as inflation. Easy to achieve since credit is made with a speech, but scaling a supply chain takes years.
To connect the issue more bluntly, excessively low rates stimulate excess demand to drive prices higher. This excess demand is compounded by the influence this has on the 3Ls, especially when the world does it all at the same time.
The public may not have heard this so bluntly, but the BIS made a similar statement. They attributed the recent surge in home prices to excessively low rates held too low for too long, not a sudden surge of population growth everywhere at the same time.
CMHC Attributes Higher Prices To Cheap Mortgages In Passing
Higher prices are often blamed on population growth, especially in Canada with its recent record surge since 2022. Home prices made a record move in January 2022, but 2021 was the lowest annual population growth for the country going back to at least the 1970s. That was also the year Canada was completing 18 homes per person the population grew by.
Source: CMHC.
How the heck did that happen? Considering how much the CMHC has stated that lower rates will help affordability, one would never assume their internal chats would contain a different answer.
“Higher prices, as a result of low mortgage rates, will…,” notes an agency staffer.
That might be an unusual take for a public used to hearing that lower rates will improve affordability. Heck, even the BoC has made that statement on multiple occasions. Strangely, that’s not how they explain the issue to professionals that actually understand credit.
In a presentation to financial professionals, leadership of the BoC presented a similar point. In 2021, they explained that low rates haven’t made housing more affordable over the past 30 years. It did the opposite—home prices climbed to absorb the excess credit capacity introduced by rate cuts. It didn’t improve affordability. It helped buyers to pay significantly more.
That’s just the BoC though—what do they know? Well, the US Federal Reserve also presented a study showing lower rates don’t improve affordability. Their key message was a reminder that affordability isn’t just the cost of credit, but also the quantity of credit. It seems obvious, but apparently it isn’t.
Canada needs more housing, especially with it’s forced population growth. Objectively, not everyone can afford them at these prices—it’s almost like they don’t exist. The forced state-backed subsidies to bailout developers also hasn’t helped with supply, but reinforced an inefficient cost that is having the inverse impact on new home building.
Yes, we know. Population growth, population growth, population growth. Consider the Greater Toronto region—the fastest growing major city in North America, building just a fraction of its estimated population growth. However since interest rates climbed, home and rental prices have stalled. Home sales have also stalled, and record inventory appeared—but more surprisingly, rental vacancies are surging, and are now higher than they were in 2019.
Which makes sense. If buyers can’t afford a home, it doesn’t matter if one or ten can’t afford it—no one is buying it. Either prices have to come down or more credit needs to be introduced to prop up inefficient prices. This is a credit issue more than a population issue.
Or maybe the CMHC’s internal messages are wrong, along with the BIS, Bank of Canada, and US Federal Reserve. Politicians might be right, and investors will continue to finance building homes until they lose money, then continue to lose even more just so people have the housing they need.
Of course it is. If you’re a working class person, you need the comforting lie of more supply will become affordable. If it were a lie, the media would state it is—but no one asks how many people in the media are paid or have financial incentive to believe a false narrative.
Kudos to Big Pun for getting it from the horses mouth, and actually showing that they’re lying—you can say it until you’re blue in the face, but no one is going to believe it was such a large collaboration to screw the poors.
I don’t know, Punwasi had a pretty good explanation on X.
Something along the lines of, “what if grocery prices doubled but you got to pay for them over 25 years. Is that an improvement of affordability? Then why the fudge do you think that strategy makes housing more affordable?” Haha.
Buying groceries is in no way analogous to buying a much bigger purchase like a house. If you cant pay for food over the short term you have got a real problem with your level of income, but the same argument hardly applies to a house purchase.
He’s discussing the term affordability, genius. Low payments don’t improve affordability, cost improves affordability.
The term affordability was entirely manipulated by organizations like the CMHC to load households with more debt and put the risk on the taxpayer.
Why try to overthink any of this? It is simple as the basic rule in economics of the law of supply and demand. The amounts of immigration and the cost attributed to interest rates directly affect supply and demand. This was a good article in general as I do not believe housing prices will be cheap again.
Reading this in the chats… Who wrote this article? The chats barely even align with what’s being said, here. They’re simply pointing out some facts. They’re not maliciously stating that they’re artificially raising anything, yes, raised prices will increase investment and starts. That’s just common sense. What’s the big expose here?
Also, are prices have continued to increase despite elevated rates. Yes, having really low rates could theoretically raise the house prices, but only if supply is actually tight. And the chats don’t mutually exclude these things. They’re just a small snippet of some conversation. We’re not seeing the rest of it.
This article seems like it was written by someone who doesn’t have even a passing grasp on economics or how housing prices and interest rates work… Supply and demand is affecting this situation, you can see that with people who are incapable of finding houses even at the extreme prices Canada has. Has. And this is often due to failures in projects because Justin Trudeau’s stimulus doesn’t carry projects from start to finish.
“barely.” LOL
If you didn’t work for the CMHC, you’d understand the statement that development feasibility improves with higher prices, by itself is contrary.
It doesn’t matter what the other words around it say, unless the part before it is “the next line is a lie!”
Simple logic, as any math major would tell you, is if feasibility improves with one factor, it declines with another. That’s the exact opposite of the BS claim that prices come down as you build more.
That analogy would make a lot of sense if you were talking about buying 50 years worth of food.
New supply is rarely
Affordable unless subsidized. However, it brings displacement whereas older less desirable housing sees people move to more desirable or new supply (due to housing formation) and leaves vacancy for which landlords compete to find tenants with incentives and lower prices or rents. It’s well studied and easy to observe in overbuilt markets.
I work for the City of Toronto, and if all of the consultations have the same group of young guys pretending they live in every neighborhood.
It’s clear something is happening behind the scenes but it’s disturbing when you find out this isn’t people being dumb, but they’re being straight up supervillains.
No surprise. Our YIMBY movement in Vancouver was co-opted by greasy mf who do the same thing, and are using the supply argument for strategic eviction of existing low income communities.
In Toronto there’s a working class neighborhood called Parkdale that upzoned all of Queen West. Mostly low income residents cheered it on thinking that meant cheaper housing, but now rhey have no idea why all of their local businesses are closing. They can’t put together that pre-up zoning is an eviction by taxation. Either pay the taxes of a 10 story tower, or move your business.
Nice explanation and write up. If housing is an investment, we need fewer economists explaining it and more analysts on the case.
The problem with turning young people’s homes into old people’s retirement plan. Country sold its young as indentured servants that front load the work to the older generations in bulk.
They always want that boggie man. First foreigners then investors, now seniors who worked hard to buy and pay off homes. Maybe government policies what ever .
Those are some important parts of the story. Although, differing contexts, timelines, and individuals involved may mean no actual lying, so I’ll stay away from that bit.
The missing elements are complex and interrelated. At a high level, chronic unaddressed drivers include: 1. Encouraging real estate as an investment. We value and celebrate the unearned wealth from asset appreciation being greater than general inflation (including income growth). We do this in many ways and the natural outcome is that the cost of shelter rises in relarion to income. It can’t not. 2. Speeding up the disparity between income and shelter cost is our declining real income. This has many drivers but a core one is our over reliance, in this country, on resource extraction (hewers of water). This hyper-depletion has, for decades been slowly making us weaker and weaker. This will continue and probably accelerate, given the stance of the likely next federal government. 3. On the notion of, and strategy for, increased supply. This may in fact have a downward pressure on prices – in a perverse way. Government’s mandated density requirements throws a lot of good planning out the window. Livable regions don’t have uncoordinated densification. This will tend to undermine the ability to create good walkable and interconnected neighborhoods (optimizing transit oriented development). Reducing the quality of life in neighborhoods and regions should have a negative impact on value. Values will still rise but, potentially slower than if we fully utilized our well developed planning processes.
Either way the unaffordability will continue to increase unabated. The value of real estate is as an investment not as shelter. We’ve created that sufficiently through our own misguided policies (which are destined to continue). We’ve done this so well in fact that our land is now an international class asset, which, of course, only accelerates the spiral.
Easy money. Unearned income through capital appreciation and resource extraction. Very little innovation or actual value creation. Easy money. This is where it leads.
It doesn’t matter if it’s encouraged as an investment or not right now. Projects are failing because they’re no longer financially viable—the same way they were failing when they were going back to buyers at pre-sales and demanding more money to finish.
How we got here is a non-point, because the discussion is now how do we continue to make housing. Right now it’s not efficient, and made even less so by the CMHC backing every inefficient project with tax dollars so that input costs never correct.
Land prices have been growing about 13 percent per year for the past 25 years. This is not sustainable. Municipal Development fees are now more than I paid for my first house. Greed is everywhere, and LONG overdue for a serious haircut. Affordability means a median wage earning family should be able to buy accommodation. This infers, that accommodation must be priced at 4 times gross family earnings. The downpayment must be achievable in a reasonable period. The math is simple. Every explanation I have heard for prices is disingenuous. It is nothing short of fleecing buyers, by all levels of the real estate industry.
So, what’s the solution? We may agree with the goal of more housing at a reasonable price and of a reasonable quality being located close to work, school, play and shopping. How do we get there?
No one’s trying to solve anything, so we never get there. The goal of Trudeau and Pierre is more economic tax units—they want forced stimulus and perpetual shortages.
Anyone that thinks Pierre’s claim that less regulation will fix this is kidding themselves. The only solution is to stop using people as stimulus, and the funny part is that’s going to happen regardless of whether the gov wants it to or not.
Didn’t the former head of the CMHC leave to work at a pension that god mad cash from them to make a massive development in the GTA?
Spoiler: everything our politicians and their minions is a lie to advance their own interests.
Bingo….all lies daily….just follow the money….been like this for decades now in Canada….and guess who took control of the country in the 60s, 70s….????….lolllllllll….what a mess.
Very well stated
So Milton Friedman, probably the most famous economist since JM Keynes, said ‘Inflation is everywhere and always a monetary phenomenon.’ 1963. So if inflation is caused by our strange fiat debt based money supply, where govts give private banks the ability to create money from nothing and lend it out to make a profit. This is why banks are both uber profitable (effectively no cost of goods sold) but also very very risky businesses. To demonstrate. A bank like RBC, decides to issue a mortgage for $1M. They dont use deposits to fund that $1M mortgage, they just create it by adding a credit and debit at the same time to their balance sheet. So as the money rolls in to repay the principal and interest, the money repaid of the principal is ‘retired’ (ceases to exist) and the bank takes the interest as revenue.
So if you are saying, well why is it like that? Well thats the way banks were set up in the 17th and 18th century. So in effect, the central part of our economy is a mercantile enterprise where the govt backs money created by banks by issuing debt. Since that time there have been some changes, like a silver or gold exchange rate for money, limits on lending vis a vis deposits, etc. However, we know that before the advent of fractional reserve banks, there was no inflation. None.
Thats nice, so what? Well the reason we have a cost of living crisis in Canada is simple. Banks have created far far too much net new money with no gdp growth for far far too long. Consider the M3 Money supply in 2014 was about 1.6Trillion. Today its at 3.7Tr. So that 220% increase in 10 years. So that was the sum of all money in the system, including various types of govt and bank credit facilities, like Tbills, BA, and so on. Over the same period, nominal GDP roes 12%? So we have the M3 rising at 220% during the same time? So if GDP went up 12%, even though the banks created 2.2Trillion in new money, our economy barely produced more this year than in 2014?
So this is how you create inflation. We are stuck because our leaders seem to believe that we don’t actually have to produced GDP, we can just print more money and it will all be good?
So with respect to the ‘supply’ argument. I agree, Trudeau clearly understands how money is created, and further understood that most G7 economies can pretty much double their money supply in 10 years, creating the illusion of growth, all the while creating massive inflationary pressure. The obvious result of this has been the massive appreciation of housing, stocks and bonds, and luxury goods. These are items people buy with credit. So if the banks are using our houses to create trillions of dollars to fool us into thinking things are OK economically, when they arent?
This is where the bubble bursts now. Trudeau has tried to kick this down the alley till he gets tossed out of office like his dead beat dad, (who had the same issues when he was PM???). So he pounced on the ‘supply’ argument. The problem is, clearly, there was never supply problem in Canada, there was a price problem. When 80% of us are competing for 5% of the housing available, thats not a supply issue its a pricing issue, and a credit issue. Excellent discussion
But, if developers need high prices to make said developments profitable… isn’t that the actual bottom line? Developers can’t afford to build a home that people can afford to buy… full stop.
That’s the problem.
You’re dancing around it… the BOC lowers interest payments so the prices rise. But, if that’s what you need to stimulate building by developers, isn’t that what you need? It’s not that immigrants are snapping up the housing, making it unaffordable for everyone else. They’re just spurring development by being able to afford the results.
If you step back and look at it from that perspective, of course housing prices spiked right after everyone that could snapped up the old housing for cheap and renovated. New housing costs what it costs to build and that’s what the price is going to be.
Why does it cost so much to build a home? If that’s just the way it is, then the only viable solution is low interest rates coupled with absurdly long terms. Or, you know, maybe we should make it profitable to make cheaper homes. It’s not interest rates that are the problem, it’s zoning and building codes.
Well, when will the doomsayers like Joel Finn finally realize that homes aren’t every going back to 2010 prices? Replacement costs are too high.
It’s time to look beyond Canada. Too hot in the summer, too cold in the winter, the health care system is unravelling quickly and the housing is incredibly expensive to boot.
The Canadian peso won’t be worth much soon and the BOC will continue to lie about inflation.
Only one lying about prices coming down is
POILIEVRE
Only way he could ever get elected
There are too many other factors in housing prices. False valuations to drive tax revenue and agent commissions are one example. There’s no smoking gun – the entire system is broken.
I appreciate the debunking, especially how scapegoating immigrants doesn’t align with the data, as usual.
Would be interested to read the author’s thoughts on what would drive down home prices. Preventing investors from buying too many homes for themselves?
Very interesting article, this is why I frequent this website.
I’m a bit confused as to how we could conclude that supply and demand don’t matter. Ultimately our population growth has been outpacing demand for decades now, not just in 2021. Which is what originally started this mess no?
BUT now we’re in too deep with this shit that credit in our highly financialized country has become so important. Meaning the supply and demand is ULTIMATELY the issue that needs to be addressed, but it CANT because supply is being impeded for the reasons outlined here? i.e inefficient prices?
Great line: “Incentive is straightforward—in a highly financialized housing market, it’s not about shelter.”
Higher interest rates in the last couple of years have shown us that there is plenty of supply. There are loads of homes for sale now, and they’re just sitting, for months sometimes. Years of artificially low interest rates (along with government policies incentivizing speculators) created a massive asset bubble in the GTA: real estate.
More money in a market increases the price of everything. Where does the extra money come from if not through low interest rates. One of the criteria for immigration to Canada is that the immigrant has lots of money. New immigrants come here with lots of money and dump it into the housing market that has supply issues. Prices have no where to go but up.
It has become almost impossible to trust our media, institutions, and politicians. They lie, and lie to cover the previous lies.
Let’s see if I got this right: make housing more expensive to solve the housing crisis? Whiskey Tango Foxtrot, what have the CMHC been smoking? The private sector need to be taken out of the housing construction business, because they won’t build unless they can gouge people. Remember, it’s supposed to be about profits before people, right?
While Singapore isn’t cheap, the government there have built and continue to build housing there, because the private sector just jacks up prices forever and forever, and no one is better off (except the private sector).
I think the point is a state can’t solve a housing crisis it’s manufacturing to prop up prices.
Singapore’s government owns the land, and 90% of the population lives in state-owned housing. If Canada wants to eliminate housing as an investment, then it’s got lots of options—the biggest being eliminating the CMHC.
Missed in this conversation is the regulatory regime. There are so many rules and applications to go through, a lot of them political, it takes forever to get anything done. This has a huge impact on affordability.
Many countries have come up with great strategies to housing. Canada should look to the successes of the world instead of coming up with half baked pandering ideas on its own
Careful pulling yourself reaching so far. The author points out that more homes can’t be built unless prices rise. Your point isn’t about that, but regarding redistribution—lower regulatory costs.
Canada has already purged most basic regulations, to the point it’s now worse than other places. No one’s building because it’s not cost effective and their other projects are sinking.
It is more complicated than that. We are still paying for 2008 and the average person can’t get ahead because the the blizzard of complicated financial instruments that the big players use to essentially steal money from the average person. Interest rates went stupidly low to bail out the financial sector, the billionaires, the hectomillioaires. That day look destroyed the effectiveness of monetary policy which is now mostly in the service of the same people that crippled the economy leading up to 2008. Economies have not operated normally since then and still aren’t. All of the other explanations are peripheral to the central problem.
“…and rental prices have stalled.”
You sure about that bro?
Bro’s positive. He linked to the data.
Now if anyone would realize Stats Can applied it’s junk methodology to rents, we might be able to have a real conversation about rents at some point.
Redicioulous! The author clearly miss-states and shadows clear and basic economic data. The real estate market has outdated CPI inflation by more than 3.1x over the last 30 years, only matching the increase supply of m2 Money Supply.
Canadas real estate has been hijacked by Developers, city planners, and special interest groups that on top of low interest rates for too long, they real estate participants have controlled the market for too long. They colllude together, planning supply and crushing the changes of demand meeting supply.
Excuse me !!!! Since when does price increase naturally attribute to more supply when the supply is being controlled. Land price is 10x the price of where it should be, farming land is more than $ 15,000 – 100,000 per acre or more !!! Its supposed to be $ 3,500 – 5,000 max per acre. If what these players do in Canada was done on the New York stock exchange, They would be in jail for 30+ years.. that’s price fixing. Enemy to to free markets!!!
You have literally not a clue what you’re talking about, but partial points for throwing in terms. Is there a random econ term generator that used, or just your brilliance?
In my small town there are a lot of houses for sale at 900 – 1.1 M and few are selling.
Housing is unaffordable now at 10-12 times average family income. If the government thinks the solution it to build more million dollar homes, it shows you who they are really in bed with.
The other worrying thing is the lack of competence of the BOC/lack of understanding of basic economics.
The only real thing that will fix housing in this country is a 50 % price drop from 2022 peaks… we are just under halfway there now, and the recession has yet really to hit. This has to be accompanied by a massive waves of defaults and foreclosures that will hurt all the FOMO infected people who bought in 2020-2023. Everyone else with an equity cushion will be fine unless they overextended themselves on cheap credit, and many did.
If the gov is going to want to let prices stay high, then the only other solution is to interfere in the market and hive everyone who wants to buy a home about $500,000. This is unaffordable if we are to have a stable economy and currency. Although affordability has never been an issue with this current lot.
Here’s the solution: GTFO of Canada.
The joint is broke, for good.
Come to Mexico, as long as you can navigate around the cartel violence and 0% trust society culture, you’ll be far better off…
“Trickle down” does not work. The more results we see of YIMBY economic theories the more proof we have that they are based on a false narrative. In San Francisco we have thousands of empty units built on false assumptions that “if you build people will come.” They do not come for small cramped units lacking amenities like reasonable prices, low property taxes, private yards, parking, sunlight, openable windows, easy access and friendly clear sidewalks. There is another theory that seems to be more accurate. Greedy people who trust false narratives stand to lose a lot of money. That is what is happening now. At least this time it is the wealthy greeding who are going broke this time.