Canadian Real Estate Doesn’t Have A Supply Problem. It’s A Demand Issue: BMO

Canadian real estate demand has never been this elevated before. That demand is the primary issue driving home prices higher, according to BMO senior economist Robert Kavcic. Rejecting the supply shortage narrative, he argues inventory levels are robust. Excessively low interest rates are just incentivizing too much demand. It will eventually end, as soon as the central bank wants it to end. 

Canadians Are Buying Homes At A Record Rate

Canadian real estate demand has been surging higher and sending home prices with them. BMO estimates the run rate of home price growth has been between 25% and 30%, a huge number. A shortage of inventory is often cited as the reason, with homebuyers facing a lot of competition for every listing they try to buy.

BMO continues to argue this is due to a surge in demand, and it isn’t an inventory issue. They want investors to consider the following points before buying into the narrative:

  • Housing starts surged above 300,000 units in November. 
  • Housing completions are at a record high.
  • Listings for existing homes are higher than they were before the pandemic. 

The inventory is near a record high, people have just never bought more homes. With 25% of that demand coming from investors armed with below-inflation mortgage rates, there will never be enough supply for the level of demand. Once that dynamic changes and rates rise, the stress on supply should ease, since it wouldn’t be as favorable to investors. 

Canadians Are Spending Double On Existing-Home Sales Per Capita

There are a few data points that highlight how much excess demand is being stimulated by overly easy policy. BMO dropped one a few days ago, estimating the Bank of Canada’s stimulus created so many home sales, just the excess is the equivalent of 6% of GDP. 

Today they have another one — resale transaction values per capita. That is, they’re looking to measure the dollar volume growth for housing, relative to population growth.

“On a real per-capita basis, resale transaction values over the past year are now running at around $17k per Canadian person 25 years and over, which is off the accompanying chart,” said Kavcic. 

Source: BMO Capital Markets.

The chart shows just two years ago, before monetary policy went haywire, the value was half the amount currently seen. Even if we assume persistent growth carried through the pandemic, the current level is way elevated above the trend. The values would need to crash a whopping 30% to get back to the trend line of growth. 

The bank has recently said the excess home sales and price growth won’t last forever. But they warn, it will last for as long as the BoC wants it to last



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  • Zach 2 years ago

    It doesn’t take a genius to realize it’s a demand problem. During the pandemic we closed the borders cutting off almost all immigration thereby easing supply constraints and yet with a glut of free money and no restrictions on speculation prices rose rapidly.

    Importantly the role of supply in determining prices is not linear. When supply is constricted (due to absolute low supply or artificial scarcity), this allows demand dynamics to determine prices (I.e. the price is as high as people are willing to pay for it). When supply is bountiful the opposite occurs-the purchaser effectively can buy the product or asset at the lowest price the seller can turn a profit at.

    These are 2 extremes. But importantly, when you are in a demand driven market you can’t just “slightly improve” the supply and undermine the prices. Increased supply only reliably sets prices when supply is excessive. In housing it’s hard to go from supply constraints to excess due to the inelasticity of supply (building houses is slow). Thus, increasing supply is almost never a short term solution in housing.

    The only solution to impact Canadian housing prices within the next half decade will be reduced demand.

    You better be patient because this government will do all it can to keep up the demand. They will bring in as many immigrants as they can. They will pump the money into the economy until even a 5th grader will tell you that inflation is hurting their pocket book.

    After all the politicians are all invested in Canadian housing anyway so why would they want to pop the bubble just to kill their own assets and probably their political careers at the same time? That’s one hot potato no one wants to touch.

    Better to let the cities empty out of workers or the productive economy fail because who could have predicted it? Certainly not me with no formal training in economics and just a little bit of common sense.

    • Dennis_K 2 years ago

      Generally agree with your sentiment Zach. In regards to your third paragraph – “In housing it’s hard to go from supply constraints to excess due to the inelasticity of supply (building houses is slow).”, I would generally agree (as building homes does take longer than producing, say, hand tools), however would also offer that the rate of home building is only part of it — the ability of those who supply housing (i.e. developers / builders) to choose how much to make available is also a factor. Why would those who benefit from an (apparent) supply constraint ever want to make any efforts to produce excess? That would only lead to having to reduce prices in order to offload inventory – and that’s less profitable. After all, similar to manufacturing, I don’t think any manufacturer would ever want to produce more than any market could absorb. Given (1) the fundamental physical need for shelter and (2) the perception of housing as an ever-appreciating asset, in the current climate of non-essential buyers being in the market in addition to excess liquidity (both legitimate & illegitimate) and the ease of which such liquidity can be funnelled into residential real estate in Canada, there just seems to be no end to apparent demand. Hence ‘building’ our way back to median affordability is highly improbable.

  • Don Jason 2 years ago

    There are no separate demand and supply problems. If demand exceeds supply it becomes supply problem. Could the demand be suppressed? Yes. By stopping immigration altogether. Will the govt do it?

    • Fazid 2 years ago

      It’s a demand problem since the housing is subsidized by way of a monetary tax the general public has to pay. Every sucker holding Canadian dollars is paying people to buy a home indirectly, and that’s the BoC’s goal.

      If the country tried capitalism for a minute and let the market control rates, you would have a real perspective of demand. Which wasn’t enough to support prices at even 2018 levels, since a massive correction was triggered by the government not inflating bonds by artificial credit printing.

  • RM 2 years ago

    Better Dwelling said this years ago… the biggest issue with speculators is that their demand is insatiable. I think there’s probably something to the “missing middle” argument but not to the degree that people make it out to be, but the reality is that when people are making money as they have been in RE, no amount of supply would curtail demand.

  • M.Bury 2 years ago

    300,000 housing starts don’t help if many of them never get listed…

  • PK 2 years ago

    BoC created problem. People without proper income have managed to buy 4 properties. I wonder how they qualify for the mortgage.

    • S.P. 2 years ago

      I totally agree with you. People falls under low income families are having more than two houses. I think enough inventory is out there but lot of average Joe’s are owning more than two houses. I solely blame it on the low interest rate. If BoC is not going to increase the interest rate fast enough house price will only slow down but not going to drop as needed.

    • Johnnywalker 2 years ago

      Sorry to say my Canadian friend but this sounds alot like the NINJA loans that doomed the US…..

  • Jim 2 years ago

    400,000 annual immigrants and 629,000 foreign students eat up the housing supply easily. Add in foreign buyers and domestic investors, and you’ve got DEMAND. Having 1.3 million empty homes doesn’t help either. Btw, what entity would bypass $20k -$30k in rental income on those 1.3 million empty properties?? Who doesn’t care about getting rental income?? Money launderers?

    • Average Man 2 years ago

      You know the 400k immigrants don’t bother me, but I won’t lie, the foreign students kinda do.

    • Jimmy 2 years ago

      I just fact checked it looks like more than 1 percent of cdn pop is foriegn students?

      Is this normal? Other countries with similar stats?

    • Johnnywalker 2 years ago

      The problem with that goal is where will they work, unless you know something I don’t know but its hard enough to get a job in Canada as it is.
      Also do we have the health care ceiling to handle all of these people?

  • Sharon 2 years ago

    Supply cannot meet the demand, so it’s a supply and demand problem. How long do you think it takes in major cities to create new homes? Demand can increase or decrease very quickly but it takes years to increase suply.

    • Fazid 2 years ago

      It’s a demand problem if the demand is unnatural. i.e. the government pays you to buy a home by suppressing mortgage rates and passes it on a monetary tax through inflation.

  • Jimmy 2 years ago

    Jim could you provide your source? Over 1 million new Canadians each year.

    Specifically, could you provide the totals for 2020 and 2021?

    Wow 629,000 foreign students (I assume you mean in total in the country) in population of 40 million.

    About 1 in 63 people in Canada is a foreign student. Could you provide a source. If this is true I am more concerned now than ever.

  • Diane 2 years ago

    More homes equals more supply for investors and we only trash our environment. You cannot have affordable housing AND have unlimited growth. Something has to give

  • Sandra Baumgartner 2 years ago

    There is also a blowback to people leaving big cities to live further away. All this does is push housing prices up in these smaller places making them unaffordable too.

  • Dennis_K 2 years ago

    For those readers (and politicians) that think the affordability issue is simply a supply problem, 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.” Even more recently, 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 recently (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.” Something else aside from absolute ‘supply’ is at play – i.e. non-essential demand & excess liquidity, in all their forms. Non-essential demand is speculators, reno-flips, ‘investors’ 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.

    I’ve looked into housing completions (as provided by the Canada Mortgage and Housing Corporation) from 2006 to 2019, plus housing starts from 2000 to 2005, (as a surrogate for completions, assuming the starts in December in one year are finished by December of the next). Over this 20 year period, there was about 3.48 million housing completions across the country, and this compares to a total population growth of about 7.15 million persons (source: macrotrends).

    Noting that over 50% of the completions between 2006 and 2019 were detached houses, semis and duplexes based on CMHC data (i.e. 3+ bedroom configurations), and assuming the same ratio between 2000 and 2005, that means these ‘homes’ could theoretically house at least 4 x 1.74 million = 6.96 million individuals, and that doesn’t include the remaining 1.74 million completions classified as ‘apartments and other’. Given that not all 7.15 million persons added to the population would require their very own self-contained home (i.e. a 1:1 ratio), it seems highly implausible that there is a housing shortage in any absolute sense. And even so, how could you measure such a population growth, if people didn’t already have a place to live?

    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. The National Bank of Canada Housing Affordability Monitor dated February 3, 2021 clearly demonstrated the extent of unaffordability, 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!

    You really think we can ‘build’ our way back to affordability? Then ask yourself 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). But who in the real estate developing / building / financing / sales food chain would want to see that happen? None, of course – that impacts their profits. 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.” W ho says that they haven’t been doing this all along?

    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.

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