Canada’s Oldest Bank Begs, “Could we PLEASE Stop With This Supply Myth?”

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.

32 Comments

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  • john hartley 5 months ago

    Well that was totally unexpected and truthfully, who would have known? The “supply” myth is usually paired with the “”shortage of land” myth all propagated to justify massive density increases. The real tragedy way beyond the dysfunctional built form that results, is that the horrible affordability issue is always exacerbated by density. Always.

    • AJ 5 months ago

      So density is the problem while the US a country with 10x the population of Canada has lower home prices?

  • JT 5 months ago

    When you look at the housing supply at the provincial level units per 1,000 people. Alberta and Ontario are roughly the same, and BC is higher. Alberta has a higher average and median household income than Ontario, however, in February the benchmark price in Calgary for a detached home was $596,000 vs. $2 million in Toronto and $2.1 million in Vancouver.

    How is it possible that all of the experts explanations of why prices are so high in the GTA and GVA do not seem to hold up against the situation that’s happening in Alberta’s cities?

    • john hartley 5 months ago

      because the so – called experts are for the most part self interested bought and paid for planners politicians and developers – is it any surprise they continually repeat a build build build mantra – all of which is talking their book. The real tragedy is that dysfunctional policy is all too often based on that erroneous bafflegab.

    • Chris 5 months ago

      Curious, where did you get the housing supply on a provincial basis? Thanks.

    • Chris P 5 months ago

      In a few years, when the roads and avenues are littered with “For Sale” signs, T
      HE SAME experts will be explaining why the crash was inevitable. (It was the same in 2006 and 2009). Problem is that the same journalists will pretend to be looking reverently into their mouths, absorbing the words of wisdom. No one will impishly ask: “But two years ago you adamantly stated that it would never happen. Here is the clip”.
      The experts are just talent-less entertainers. Time fillers. And they know it. They have no skin in the game, not even someone reminding them of their past follies (or outright corruption). Being called an expert in media context should be considered an insult.

      • Mike 5 months ago

        Anyone with a brain has known this. The supply issue is pumped by shockingly the realtor association and developers. Go figure, prices are from speculation, just go on Tik tok or IG to see how many people are giving advice on how to become rich on real-estate, look at your neighbors with a investment properties. They are the problem.

    • Agent bob 5 months ago

      It’s pretty simple. Stop the money laundering.
      Transparency International Canada estimates that up to 130 billion is ‘ Snowashed ‘ in Canada per year with much of that going to real estate.
      I’m betting most of the 1, 400,000 vacant homes in Canada are owned by money launderers and non residents.
      We need to tax vacant homes at a rate of 50%.
      Give the owners one year to either sell or rent them.
      See how fast supply changes then.

      • Norm 5 months ago

        Only slightly over 2% of Ontario homes sell to foreign investors. Mr Porter, If it’s not supply, why the 30% increase in prices. You write this article saying what it isn’t without knowing what it is

        • tony sbrocchi 5 months ago

          He’s always had a negative outlook. He’s never been right. Toronto, for example, currently has less than 22 days of inventory listed on MLS. The reference made to 2009 by one of the other commenters was a result of the US sub prime crash that pulled the Canadian housing market down for @ 4 months, then we bounced back hard. People need to realize our rela estate market is nothing like the US and we need to stop that comparison as well.

  • Oops 5 months ago

    Supply was always a meme championed by those worshiping at the alter of free market orthodoxy.

    Neoliberal fanatics simply cannot cope with the reality that housing can either be a great investment or good for society as a consumption good that is cheap (key word is consumption). Over time, as this country faces tremendous challenges on the economic growth side, I suspect this will be realized by more and more people (assuming they become disenfranchised.)

    It will turn into a zero sum game fast.

  • Wisdom 5 months ago

    Now that residential real estate has been financialized and considering how far out valuations are, we may be surprised at how fragile and sensitive Canadian real estate has become.

    A very large number of dwellings are now investor-owned (rather than end-user owned) and they own for two reasons only – expected appreciation and steady fixed cash flow – and both are linked to valuation/price. If an initial price decline occurs and a new trend downward appears imminent, many owners of investor-owned dwellings would be very motivated to sell (and may move quick).

    Pile other potential sellers/holdouts on top of that – retirees or near-retirees looking for top dollar; those who bought too much house in the last few years and worried about being underwater; possible casualties if a recession ensues; etc. – and there could be quite a waterfall of new listings.

    Suddenly, we’ll see that supply was never the issue! It was house hoarding & holding out (caused by policies that produced a ‘never can lose’ market psychology) that lead to ever lower turnover. TURNOVER is the issue – everyone wants to hold onto the golden goose…until it becomes rotten. Then the rush begins…

    At the same time, excessive demand was pulled forward due to FOMO and inappropriately easy policies.

    Someday, with new listings growing (and actual supply still growing at a significant clip), investor demand waning, and local end-user demand diminished by being pulled forward, prices will likely continue to erode more significantly. Any interested buyers are likely to ‘stand back’ as prices drop to find their new fair equilibrium that is better supported by fundamentals.

    Amid all this, a persistent level of consumer inflation may impede the usual “prop-up” options of “massive fiscal injections” or “dropping rates to .25%”, especially if the rest of the world is not recessioning yet. (If a global recession ensues in the next year or two…eep.)

    Never before in the history of humankind has a bubble continued indefinitely. This time will be no different. Eventually, these sorts of absurd imbalances can’t be continued and the elastic will snap back. Markets simply become exhausted and the supply of greater fools runs out. The big question is – when might this happen??

  • Chris 5 months ago

    Soon the people of Toronto will be grateful they got oubid!!! Shockingly we’ve been lied to. Here comes the aftermath!!

  • JH 5 months ago

    You can’t compare Canada to the US. In Canada there are essentially only two cities (and surrounding areas) with large economies . That’s what is in low supply in Canada and that’s why those two cities have astronomical prices completely out of touch with average incomes, and they drive up the national average. The US has at least a dozen or more cities with equal or greater economies. It always just boils down to supply and demand.

    • Barry 5 months ago

      Well in my White Rock neighborhood they’re ripping the heart out of the land. Cheek by jowl construction on property stripped of every tree to facilitate construction. Two new 28 story towers (Foster Martin complex … third tower one coming soon) on my street. The penthouse on top proudly flew the Chinese flag on October 1st – the day Mao Tse Tung celebrated his mainland conquest in 1949. Supply and Demand mantras in housing presently serves institutional investors, realtors, developers and construction companies. Properties are flipped commodities for quick profit and not homes for families. In the end it is highly unstable, a boom which becomes very nucleus of any sustained market crash and not conducive to ANY precept written by Adam Smith who strongly believed in a tax on unproductive land prone to speculation. Wake Up!

  • Prudence Jones 5 months ago

    Soon we’ll see that supply was never really a major issue (but rather just a convenient pretend boogyman to raise prices). The real issues are too-easy policies, financial repression (ie. too-low rates & QE for way too long), investor house hoarding & holding out (caused by inappropriately easy policies that produced a ‘never can lose’ market psychology) that lead to ever lower turnover. TURNOVER is the issue! – everyone wants to hold onto the golden goose…until it becomes rotten. Then a house may return to being…a shelter! (and cease being viewed as a cash cow for the long term good of society)!

  • Fred 5 months ago

    Is there a link to Douglas Porter’s report that you are referencing?

    • André 5 months ago

      Yeah, I just google it, can’t find anything but better dwelling article.

    • Ian Brown 5 months ago

      It’s for capital markets customers, but I’m sure they’ll send it to you if you email them. Some people posted the whole piece on Twitter I noticed.

  • John 5 months ago

    Pretty sure Doug doesn’t want to live in Yellowknife or Flin Flon…

  • Rick Abrams 5 months ago

    While the little that I know about Canada’s housing prices comes from Better Dwellings, what I know about Los Angeles housing market comes from my direct experience as an Angeleno for more than 50 years and real estate broker and attorney. The main cause of Los Angeles’ high housing costs is one thing; vast corruption to impose the New Urbanism on Los Angeles. The city council operates as a criminal enterprise in violation of Penal Code 86. The number of scams it promotes are too numerous to describe here. Back in Jan 2014, when Los Angeles still have a semi-independent judiciary, Judge Allan Goodman rejected the update to the Hollywood Community Plan, which called for vastly more dense housing construction, ruling that the city “intentionally used fatally flawed data and wishful thinking to the extent it subverted the law.” Judge Goodman was soon removed from the bench an the attorney who provided the accurate data was disbarred.

    The New Urbanism and its demand for dense urban areas is a world wide hoax to make a few land owners in the core into vastly wealthy multi-billionaires. This danger was described back in 1915 by the LA city civil engineers. Starting after WW II, the developers and a corrupt city hall have violated every rule in the 1915 Study. The result has been the flight of Family Millennials from the state. Now LA has a huge housing glut and a homeless Crisis because they torn down poor people homes to construct high end units.
    https://bit.ly/3KKKX87 March 13, 2022, CityWatch, L A Oligarchs and Moral Cowards Are Destroying Our City,

  • Nomobaloney 5 months ago

    High housing costs make it difficult to afford to get educated and thereby undermine opportunities to succeed; make it difficult to afford basics like transportation, food, clothing; they undermine a basic sense of security and they make it difficult to consider pursuing personal interests. The list goes on and on.

    Charles Dickens wrote all about the perils of classism.

  • Ken L 5 months ago

    The main reason for the GTA escalated housing prices per house hold income compared to Florida for example is the high cost of land and multiple taxes built into the price of a housing unit and this is mainly due to government policies and not lack of supply of land or labor. Florida has many environmental conservation regulations but still able to stream line the permitting process at reduced costs and able to make available enough land available for development. Unless we fix our policies, we Canadians will always be paper rich and cash poor.

  • Doug Forkes 5 months ago

    “Douglas Porter explained Canada is promoting an incorrect supply narrative.”

    So Mr. Porter is right, and 38 million are wrong?

    House prices are high because houses are sold to the highest bidder. If they were sold to the lowest bidder, they’d be low.

  • Les sulpher 5 months ago

    I believe that Mr. Porter is dealing with one issue and is correct, But I believe that the Canadian government printing money is more detrimental to housing prices than the supply lie narrative promoted by the Federal Liberals.

  • Paul Fucili 5 months ago

    The difference in Canada is that the high prices are concentrated in a couple of cities. The US population is more spread out but even in a place like New York and San Francesco the prices are extremely high.

    Secondly we have higher levels of immigration than these other countries and they are virtually all heading for Canada’s two major cities.

    Thirdly we see the effects of massive government overspending and its impact on housing. Asset inflation anyone?

    • Omar 5 months ago

      Canada’s fastest home price growth isn’t in the few cities, but it’s spread to literally every part of the country. Home prices in the middle of no where in rural Ontario are rising more than 2x the rate of Toronto.

      That’s the problem. People from Toronto have been more than happy to leave when they’re under 30, but they’re now finding prices are almost the same. Toronto has seen more young people leave than arrive for over half a decade now.

  • Dennis_K 5 months ago

    I’m so glad that at least there’s one major bank that sees the affordability crisis for what it is, and more importantly, for what it’s not. For anyone (including politicians) that think the affordability issue is simply a supply problem, in addition to reading BetterDwelling regularly, I suggest they look at the September 13, 2020 on-line Globe and Mail article entitled “The ‘supply crisis’ in Canada’s housing market isn’t backed up by the evidence” by Professor Josh Gordon for an excellent summary on the topic. As it’s stated in the article: “Yet that peer-reviewed research is dismissed or ignored by advocates of the supply narrative. In fact, the case for the supply narrative is so weak that, after several years of research in this field, I have yet to encounter a single academic peer-reviewed article which documents a substantial causal link between supply-side factors and housing unaffordability in Canada.” As stated more than a half-year ago, BMO’s senior economist Robert Kavcic suggested more focus be placed on the demand-side of the issue, given that Canada has never before seen the rate of housing completions we have recently (see the August 18, 2021 BD article ‘Canadian Real Estate Needs More Focus On Demand-Side Issues: BMO’).

    Even the Australians know that just simply increasing supply is not the solution; as the Assistant Governor of the Reserve Bank of Australia stated late last year (November 2021): “There’s no example in Australia, or internationally, where supply expansion on its own [has] generated house pricing declines of a similar order of magnitude to the kinds of cycles in house prices that we’ve seen in recent years.” To me, other factors aside from absolute ‘supply’ are at play – i.e. NON-ESSENTIAL DEMAND & EXCESS LIQUIDITY, in all their forms. Non-essential demand is speculators, reno-flips, ‘investors’, corporate entities, ‘trusts’ and people using real estate to hide money – anyone who doesn’t live and work here, and also doesn’t need a principal residence.
    Excess liquidity is easy / cheap credit, bank of mom & dad, any capital unrelated to working (& paying taxes) in Canada, and laundered money as well as tax avoidance schemes.

    We know that home prices have out-accelerated median incomes since at least the year 2000 (source: Bank of Canada presentation to the Canadian Association of Business Economics, August 2015). Previously, prices were typically 3-5x’s median incomes, but now have ballooned to 8-13x’s as much (or more). The National Bank of Canada Housing Affordability Monitor dated February 3, 2021 clearly demonstrated the extent of unaffordability (over a year ago), by showing the amount of time it would take persons with median household incomes just to save for a down payment, based on the median home price in their metropolitan area (& assuming no pre-existing debt). It’s 289 MONTHS in the case of Toronto. The latest NBC monitor (2021 Q3) shows its even become WORSE since then (i.e. 330 months in the case of Toronto). And that’s just for the down payment; not the mortgage!

    For anyone who really thinks we can ‘build’ our way back to affordability, I wish they would ask themselves this: how much do we need to build, of what type and where, for prices to DECLINE back down to the realm of median affordability? It means we would need to effectively OVER-BUILD by at least 40-50% for prices to decline down to that extent (given the differential between incomes and prices indicated above). That’s alot of ‘over supply’ that would need to be made available for prices to actually drop. But who in the real estate development / building / financing / sales food chain would want to see that happen? None, of course – that impacts their profits. After all, what manufacturer ever builds more than they can sell? As a September 15, 2021 article entitled ‘Federal election 2021: More supply won’t solve Canada’s housing affordability crisis’ states, ” … if total supply increases to the extent that prices do fall, developers can always slow down the rate of new construction.” Who says that they haven’t been doing this all along? Claiming ‘slow’ approval processes is a very convenient way to side-step an examination of this question, as well as claiming development charges are excessive (but where nobody who claims this can explain why prices have gone parabolic for re-sale housing as well – to which these charges don’t apply). And with real estate agents and brokerages getting their compensation as a percentage of the selling price, and splitting it, it’s always in the interest of both buying and selling agents to see prices get pushed up higher, all to the detriment of the one party that has the most at stake — the buyer. The buyer is actively being worked against; there is no one in this chain working for their interests.

    The real estate industry lobbyists simply turn a blind eye by not asking a simple question: what is this ‘demand’ they speak of, based in? Have they asked if the demand is ‘rational’ — meaning, is it only people who live & work in Canada, and need a principal residence, the ones who are buying (and have been doing so since at least the year 2000 – the approximate time the BoC itself indicated in 2015 that prices were out-of-step of median incomes)? I think not, for if it was, then it would be mathematically impossible for prices to (continuously) outstrip median incomes, as they have.

    We simply can’t ‘build’ our way back down to median affordability — in as much as there continues to be non-essential buyers in the marketplace, along with excess liquidity, and an industry who has a vested interest in keeping supply tight (relative to apparent demand) & prices as high as they are.

  • Agent bob 5 months ago

    You are right. There is a lot of supply sitting vacant. OECD estimates that over 1,400,000 homes in Canada are vacant.
    The government put a 1% tax on these homes but that will have no effect in getting these absent owners to either sell or rent.
    We should give these owners, who are most likely money launderers and non residents, one year to rent or sell and then tax them 50% of the value.
    We don’t need these vacant homeowners.
    At least the government has done one right thing and that was to cut off non resident buying for 2 years. There is no doubt that non residents have contributed to to the rise in prices. They have been buying over 20% of condos for many years allowing for those prices to go up exponentially which in turn affects prices all the way up the chain. And, as previously stated, they most likely own many of the vacant homes.
    We have got to make investing in real estate less profitable. Investors should not be able to write off mortgage interest or many other current allowable tax write offs. Also, there should be a yearly tax of 3% of the value of the property.
    This will discourage investment in real estate.

  • Jonny 5 months ago

    Yeah, because you can’t buy property through an intermediary? No one is interested in the number of officially registered “foreign buyers”, the number “officially” is too small to really move the needle in a meaningful way. What matters is the volume of foreign money. That is not “officially” tracked by a government body because they don’t want to know.

    Also, there is no supply issue. 1.4 mil empty homes should is a pretty big indicator that is not.

    Go to the official government stats website and look up the official numbers of deaths, births and immigration and then compare it to new housing starts and people per house and you’ll soon realize that we’ve been building more houses than we need for s long time. Lastly, visa holders only number in the 100k numbers per year and are transitory so there simply isn’t enough of them to soak up the excess inventory over the years.

  • Jonny 5 months ago

    To those saying there a supply problem, let me give you some numbers.

    ~300k (avg) people die a year in Canada,
    ~300k (avg) people are born per year in Canada. The only delta is immigration.

    And, again the average per year is ~300k new immigrants net. Some years it’s higher, some lower but the average is about ~300k.
    If we take the real median numbers of people per household (not counting vacant and vacation homes), it’s about 3 persons per household. That meas we only need about ~100k new housing starts per year, but we’ve been averaging ~125k per year for about 17-18 years. That’s at least 4 years of excess inventory already built. The excess supply is being soaked up by speculators, both with domestic and foreign money. If you think speculation is good or normal, than I guess we don’t build enough housing, but under normal circumstances we do and then some!

  • Joel T 5 months ago

    Do we have a good understanding for how supply isn’t low yet housing prices *and* rental prices are sky high? The argument for high rental prices is that would-be buyers continue to rent because they’re priced out of buying a home, but unless the home that they would have bought is sitting empty, it needs to absorb either a homebuyer or a renter somewhere. Yes people are buying up homes with cheap credit, but they’re generally renting them out too, right? Shouldn’t that offset the reduction in affordable homes and lead to stable rental prices?

    I’d be willing to consider that these homes are sitting empty in some provinces, but BC (which has the vacancy tax) has seen both massive increases in rental prices and housing prices and yet an extremely low rental vacancy rate. People can’t find a place to live through either buying or renting – doesn’t that ultimately mean that supply is too low?

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