One of Canada’s most prominent economists really wants you to stop blaming high home prices on supply. BMO chief economist Douglas Porter explained Canada is promoting an incorrect supply narrative. In a piece literally called, Could We PLEASE Stop With This Supply Myth?, he breaks down a chart in Budget 2022. The Federal Government felt it showed how scarce housing is, but he argues it shows the opposite. The chart actually highlights Canada’s overpriced and well supplied, relative to other countries.
Canada’s Shortage of Housing Is Greatly Overstated
Canada’s oldest bank explained the narrative of supply-side economics is way overstated. “How many times have we all been told in the past year that Canada’s raging housing market is largely due to the fact that we have ‘the lowest supply of housing in the G7?’,” asked Porter. “Well, consider the attached chart, from the Budget (sourced from the OECD, whose job it is to compare stats across major economies).”
The chart he references is from Budget 2022, and it appears Canada felt it supports more supply. Budget 2022 had a significant focus on the shortage of housing causing high home prices. They propose spending billions to spur more development, claiming it will restore affordability. This is despite billions spent on similar programs failing to create more supply. That implies the funds spent only improved the profit margins of the supply created.
“First, Canada’s supply is not particularly out of line with the OECD average, and certainly not much different than any of the UK, U.S., or Australia,” explained Porter. “And we have made the point many times that given a younger population than Europe or Japan, we would naturally have a lower ratio—kids don’t own homes.”
Not totally true. Canadians have begun buying their school-aged kids homes, believing home prices will always rise. If home prices rise 30% per year forever, they’ll soon be a billion dollars. What parent would let their kid try to pay for a billion dollar condo when they can buy a few today? Clearly this is supply-related and not the territory of speculative mindset.
American Home Prices Are MUCH Lower With “Less Supply”
Porter also notes a key point in the G7 argument fails with the United States. “… a technical point, Canada is in fact NOT lower than the U.S., so it isn’t even the lowest in the G7,” points out Porter.
Adding, “yet, somehow, our average home prices are (roughly) 60% higher on average than in the U.S., with essentially the same level of supply per capita.”
Last year, the US Federal Reserve warned monetary policy may be creating a real estate bubble. In December, a model maintained by Dallas Reserve staff confirmed housing is a bubble. Staff acknowledged this means the US entered a real estate bubble a few weeks ago. By definition this means home prices have grown faster than fundamentals warrant.
In contrast, that same US Federal Reserve model shows Canada entered its bubble phase in 2016. The model shows only one brief break in bubble sentiment, but otherwise it was consistent. Canada only declared the market as “highly vulnerable” in September. They recently abandoned the domestic warning bubbles, and then doubled down on supply.
It’s important to note Porter advocates for more supply. However, addressing the wrong reasons for surging home prices means ignoring the problem. In fact, it risks exacerbating many of the same issues driving home prices higher.
“Yes, we should do all we can to encourage supply; but clearly there is more at work here than that,” said Porter.