Canada’s Real Estate Bubble Won’t Be Protected By Population Growth: BMO

Canadian real estate prices won’t correct due to population growth, right? Well, BMO Capital Markets shared a different take with institutions this morning. The bank explains there is no historical evidence to support this narrative. During the last significant home price crash, Canada saw its population grow at a faster rate. They warn interest rates have a far greater influence on home prices than population. 

Demand For Homes Has Plummeted Despite The Population Boom

Despite booming populations, Toronto and Vancouver’s latest numbers show a sales drop. The two cities report a couple weeks ahead of national data, but the same trend is expected. Higher interest rates killed demand for mortgages, but it’s too soon for that impact. Higher rates broke the speculative mindset, an issue BMO has argued would be the case, for months.

Before you crack open the emails to explain things are still busy, relax. BMO explains the drop in sales sounds larger than it is, due to a base effect. Volumes are still elevated but don’t dismiss the drop entirely. 

“Still, the drops are notable, with Toronto sales down more than 40% y/y, and that’s just the early days of higher rates,” says Douglas Porter, the bank’s chief economist.

Canadian Population Growth Has No Correlation With Home Prices

Just a blip, right? A bazillion immigrants are coming, creating a price floor that will stop prices from dropping. Let’s look past the fact a fifth of recent immigrants want to leave due to the cost of living. We’ll also gloss over the fact that studies show Canada is looking less competitive by the day. Heck, let’s even gloss over the poor value proposition for immigrants today. Let’s only focus on BMO’s latest chart showing no correlation between population and home prices. 

“Housing bulls are convinced that rising immigration tallies and strong population growth will keep a firm floor on the market,” he said. Adding, “Perhaps. But the attached chart shows zero correlation between population growth and home prices.”

Rates Trump Population Growth When It Comes To Home Prices

In the above chart, we can see little correlation — prices even surge before demand in some cases. The issue that jumps out most is the price crash in the early 90s, though. It didn’t matter that population growth was stronger than today, home prices fell. Back then Canadians also believed there was no more land, as is often the case during a bubble.

“One would assume the former [population growth] would lead the latter [home prices rising], at least somewhat,” said Porter. “Yet, note the example of the early 1990s, one of the toughest periods in recent memory for the Canadian housing market (and certainly the Toronto market).”

“In the past four decades, the three years from 1988-1990 just happened to post the strongest population growth—and that did not stop an outright drop in home prices at the end of the period amid a steep rise in borrowing costs. Just a word of warning.”

Demand drives home prices higher, but demand is bigger than just the number of people. Liquidity, which depends on leverage and credit availability, ultimately drives prices. It doesn’t matter if home prices were $1 million last week, if the next qualified buyer only has $800k. The seller either accepts less or gets to keep the property.

This isn’t just an issue BMO has been hammering at. The Bank of Canada (BoC) previously explained low rates didn’t improve housing affordability over the past 30 years. People just adjust their budgets and pay more for the same thing. Oh well, 30 years in the wrong direction can’t be that bad, right?



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  • Busrider 2 years ago

    Not sure I’d dismiss this as much as Porter seems to do. House prices can change faster than population growth levels. What we might be observing when we see house prices changing before population growth levels is the market pricing in expectations of the population growth.

    • David Chan 2 years ago

      That’s why the growth trend is normalized to a multi-year trend to reduce volatility distortion.

      It’s clear the VALUE of money is the issue. it doesn’t matter how much things cost, it matters what money can buy. The government inflated home prices and now multi-millionaires like in homes that used to cost $200k and they’re too clueless to realize that’s the same position on the social ladder they always were.

  • GTA Landlord 2 years ago

    It’s the same narratives every bubble. Foreign buyers, speculation, low interest rates (relative to the historic normals), population growth, etc..

    The fact is a bubble happens when there’s nothing else going on so the excess money drives non-productive growth. No one in their right mind would start a business in Canada that’s capital intensive at this moment without a sweetheart deal from the region subsidizing taxes or rents, like the big tech companies get.

  • Bruno 2 years ago

    Forget immigrants now. If you’re a long time immigrant, talk to your friends back at home. I thought I left behind a crumbling country and really it was just a missed opportunity to see mobility rise with the development.

    Because little opportunity exists, its hard to see the Fed let their golden goose go without a fight though.

  • Joel Lindsay 2 years ago

    Great stuff, but can you post the source link?

  • Steve M 2 years ago

    I’m not an economist in any way, but can someone explain in simple terms how a population boom could ever help with lowering home prices? I think economists have too many spreadsheets and numbers in their head, and have lost touch with reality. Maybe I’m missing something, but as more people enter the (country) housing or rental market, they reduce supply, and often raise the base cost for the general population, because eventually someone new to the country will pay said exorbitant rental cost and move the monthly cost benchmark ever higher, continually pricing many people out of the market?

    • David Tran 2 years ago

      It’s not economics it’s finance. If people can only afford an $800k mortgage it doesn’t matter how many people there are, they can only afford that much. People understand why low rates raise prices but the cognitive dissonance makes them incapable of understanding that higher rates do the opposite. It’s an interesting phenomenon.

  • questions guy 2 years ago

    rates trump all

  • Lou 2 years ago

    These values of new comers vs market are at best sub-related. This situation is uncertainties “trust” at the highest level how many historical data pull. The inference to 1990 data (1989)was a complete reserve reform, it doesnt not correlate previous recessions etc. Speculation is not a primary indicator the market dictate but yes the purchase power is important factor but people still will want to own as oppose to rent is as high. Forget all the historical data in the current conditions. The long-term supply issues and even if there was enough it’s pricing can’t go lower. It is my opinion that the new subventions HBP RRSP for for new home owner access will only contribute to phase out “some” of the hikes by then. it still is not enough. The inflation will definitely add to the price.

  • Scott 2 years ago

    Why are all levels of Canadian government making policies and legislation that is designed to fail? Is it so, in 3 years they can say the opposition ruined their plans and therefore we should be re-elected? Or is it simply because pot has been legalized?

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