Canada’s oldest bank is doubling down on its claim the housing supply shortage is a myth. BMO Capital Markets wrote to clients on Thursday morning with another data point — completions compared to household formations. The bank’s analysis argues housing completions have outpaced household formations for two decades. However, easy credit and wave after wave of demand stimulus has driven excessive housing speculation.
Canada Has Built More Homes Than New Households For Two Decades
New data from the national statistics agency challenges the narrative of Canada’s housing supply shortage. “Canadian Census data on private dwellings occupied by usual residents suggest that household formations have consistently lagged new housing supply for the better part of two decades, even accounting for some likely underestimation of formations,” said Sal Guatieri, a senior economist at BMO.
BMO Estimates Up To 92,000 “Surplus” Homes Were Made In The Last 5 Years
His calculations show household formations average just over 181,000 in the five years leading to 2021. In contrast, last year the market saw nearly 223,000 newly completed homes, as home prices continued to accelerate. Over the past 5 years, he estimates a surplus of 92,000 homes — eclipsing demolitions, less than half that number on the high estimate.
Cheap Credit and Speculative Dreams Drove Excess Demand
Ask any Canadian and they’ll tell you the best investment is real estate. Having gone on a 30-year run, most people assume this means home prices will forever continue to outpace any productive investment. That unfortunately might not be the case.
Last year, the Bank of Canada (BoC) Deputy Governor explained low rates helped to drive home prices higher. Traditional monetary policy believes that lowering rates allows home buyers to save money on interest. In reality, the Deputy explained people just borrow more to pay for the exact same thing.
It wasn’t until last year that the BOC considered the role of psychology in credit demand. They found 30-years of driving interest rates lower helped to inflate home prices and move money from the productive economy to non-productive speculation of financialized assets.
“The country doesn’t have a supply problem so much as an affordability problem due to recurring waves of excess demand pressure,” explains Guatieri.
To paraphrase a popular statement from the last time Canada thought it was underbuilding and it was proven wrong — it’s the money, stupid.