Canadian Real Estate Needs More Focus On Demand-Side Issues: BMO

Canada hasn’t seen this much housing being delivered in a very long time. BMO senior economist Robert Kavcic wrote to clients about July’s new housing completion data this morning. Canada hasn’t built this much housing in decades. While some supply-side issues remain, it’s less of the concern it was a few years ago. Instead, he suggests more focus be placed on the demand-side of the issue.

Canada Hasn’t Built This Much Housing In A Very Long Time

Canadian housing completions are running much higher than usual these days. Urban new housing completions hit just under 180,000 annualized units over the past 6 months. BMO said this was the highest total on record since the mid-1970s. 

When including smaller and urban regions, that number gets boosted significantly. Canada has been averaging well over 200,000 annualized units over that period. “In other words, there is supply out there,” said Kavcic.

Canadian Housing Completions

The seasonally adjusted, 6-month annualized Canadian housing completions for urban areas (CMAs).

Source: CMHC; Haver Analytics; BMO.

Even adjusting for the population base, they note this is in line with the long-term average. No shortage of supply, but supply is actually coming in at one of the fastest rates in years. “Near the highest of the past two years, he said. 

Canada Has The Fewest Homes Per Capita In The G7, But It’s An Irrelevant Point

The economist subbed another from a Big Six (the red one), addressing the G7 per capita argument. Recently the idea that Canada has the fewest homes per capita has become a point of discussion. It doesn’t really make any sense, but now some people think every country needs the same number of homes.

“There’s a common argument floating around that Canada’s housing stock is the lowest in the G7 on a per- capita basis, so therefore we don’t have enough”, he wrote.  

That might make sense if Canada was similar to the old European countries it’s being compared to. “The problem with that is that each country has a different demographic profile and different housing preferences. For example, a younger population with more kids per household (like Canada), should probably have a lower per-capita stock,” adds Kavcic. 

Canada Has Supply Covered, But Needs To Cool Demand

Now the supply-side is on track, with the most housing built in years. However, no one’s talking about the demand-side issues created. Canada has been stimulating demand beyond a natural mechanism, through programs like QE. This results in pulling forward demand into the current window. Ultimately creating a disorderly flow of buyers, resulting in excess demand. 

There are a few issues that compound in this area, like down payment assistance. Most countries roll out buyer stimulus programs like this at the bottom of the market. When people won’t purchase a home, they provide incentive. Kavcic concludes,“There are certainly some supply-side issues, but the demand side of housing in Canada needs to stay in the conversation.” 

Canada rolled-out demand stimulus along with record home sales, creating more demand on top of record buying. Saying it’s a supply issue is a little rich, to say the least.

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24 Comments

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  • Trader Jim 12 months ago

    Over one home completed per person added to the population, and somehow there’s still a “shortage”.

    Everything is lumber.

    • Ian 12 months ago

      Of course everything is lumber. What does that even mean?

      • Kate Wright 12 months ago

        I’m guessing it’s a reference to lumber having more than enough supply, but demand was forced into a small window resulting prices rising to $1600 from $200.

  • Vincent Fornelli 12 months ago

    If people vote for a government that lets them blow their brains out with debt, what do you care? Sit back and enjoy the market. This is great for homeowners, who boost the economy.

    • Christopher Barclay 12 months ago

      Let people borrow what they want. Don’t expose the taxpayer to it, or devalue the currency to make sure they can borrow extra though.

    • Lou Chao 12 months ago

      haha. Sure. But don’t do it with my taxpayer dollars.

  • Keith 12 months ago

    Palantir (Peter Thiel’s company that oversees government and military data collection) is buying gold for a “black swan” event. They aren’t into the inflation game either. Party on!

    https://www.cnbc.com/2021/08/17/palantir-bought-50-million-in-gold-bars-in-august-as-cash-accumulates.html

  • Omar 12 months ago

    I’m surprised more employers aren’t having this discussion. Starting wages in Toronto for some industries are up 20% -30% from last year just to deal with housing costs.

    • David Chan 12 months ago

      Big issue, especially with junior talent. You can’t give them 20% raises just because the government wants to transfer the wealth to older homeowners. it’s a huge issue.

      Retaining talent is getting tougher and tougher even at big companies. The worst part is when you have to pull the trigger and give a 20% raise, they aren’t happier. They can just afford the basics anyone else could have with much less a few years ago.

      • Charlie Lee 12 months ago

        “unacceptable to see home equity fall even a little”

        Combine your point, with the Adam Vaughan quote, and you understand why businesses have to go to Conservatives. We don’t even need tax cuts, we just need inflation under control.

        • Doomcouver 12 months ago

          The BoC has fully painted themselves into a corner. To control inflation they’d need to aggressively hike rates, but in the process the following bad things would probably happen:

          – house prices and the stock market would collapse
          – the government of Canada would struggle to service its’ debt, either a debt default or heavy austerity would be the result, neither of which would be good outcomes for Canada
          – the one bright spot for consumers is we’d probably see a spike in the Canadian dollar, however the competitive advantage Canada gets from a low dollar would evaporate

  • Whiskey Foxtrot 12 months ago

    I’m loving this market. Not because I’m in it, or my house is soaring in value. I agree the latter is transitory.

    I believe the fun part is watching everyone try to come up with explanations to justify why people are paying insane premiums to purchase a home. Sometimes it’s just because people are stupid. Stupidity is contagious.

    • Doomcouver 12 months ago

      Yeah exactly, it’s deeper than just stupidity though. Canadians have a dangerous amount of herd mentality and recency bias.

      Housing isn’t always a good investment, in fact from a historical sense it’s usually a bad investment. This shouldn’t be a radical idea, and yet you’re now in the minority in Canada if you feel this way.

  • Charlie Lee 12 months ago

    This is why raising rates is such a silver bullet. Throttle credit, increase incentive for productive investment, and lower demand for housing until people are ready. Home prices will fall a little, but society will be much more productive.

    • Doomcouver 12 months ago

      True, but I think you’re underestimating the downside risk to the housing market. Valuations have risen so high now their fundamental supports are way way below current values.

      Rising interest rates won’t be universally good for Canada. Over the short term it will be very destructive and could very well cause a horrendously bad recession. I want to see higher rates as much as anyone, but I would have liked to see them over a decade ago when we had the chance to avoid the runaway asset inflation we’ve now experienced.

      • Average Man 12 months ago

        I am cheering for the recession. The chances that anyone will actually be left to starve or freeze to death are minimal. We will have a bad time for a few years, some people will be very sad, and then we’ll go back to having an economy.

        And I know that sounds hard hearted, but look, I’m a socialist. I wanted a more managed economy. But most people want capitalism and I’m a democratic socialist, so I respect that. But if you want capitalism, you need recessions. They’re an important part of the system. If Canada had really taken the kick in the teeth the US and Europe took in 2007-08, we’d be in a better place right now.

        • Doomcouver 12 months ago

          You’re right, recession and asset correction are definitely “baked-in” to a functioning capitalistic economy. The duration and amplitude of Canada’s current boom is concerning however, it’s over twice as long than the 7-10 years an asset boom usually lasts before a correction.

  • Dennis K 12 months ago

    I’m glad somebody of ‘authority’ finally had the sense to look into the ‘supply problem’ argument, and recognize that it doesn’t add up.

    In my own research looking at the 20 year period since year 2000 (the time since home prices out-accelerated increases in median incomes according to the Bank of Canada), there was about 3.48 million housing completions nationally (CMHC data), compared to a total population growth of about 7.15 million persons (source: macrotrends). Over 50% of the completions between 2006 and 2019 were detached houses, semis and duplexes (i.e. 3+ bedroom configurations), and assuming the same ratio back to 2000, these homes could theoretically house at least 4 x 1.74 mil = 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 place (i.e. a 1:1 ratio), it seems highly implausible that there’s a housing shortage in any absolute sense — so why the price surge?

    And how could anyone explain the run-up in prices beyond median (working) affordability – a march the Bank of Canada itself stated in 2015 has been on going since year 2000 (an increase in the price to income index of 50%)? Sounds like something else is at play that real estate ‘experts’ missed – maybe they’re not looking to ask whether the ‘demand’ is actually rational, reflecting the additional burden of ‘non-essential’ buyers in the market, including the influence of foreign capital and excess (short-term) liquidity.

    It’s amazing to me that real estate ‘experts’ have been pushing the ‘supply problem’ argument for so long and getting away with it – see 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.”

    And that note issued by one of the Big Six banks regarding the G7 per capita argument – I’ve read it, and it makes some serious assumptions that it does not back up – such as the one regarding differing demographics which Mr. Kavcic mentions. My view is that it only looks at one piece of data, and nothing else (i.e. refuses to look at the broader context). I wrote to the author of the note, asking for their raw data, and never heard back.

  • Jim 12 months ago

    Balderdash. Rising home prices help more Canadians than they hurt, and that is why the government/central bank policy is to inflate home prices with QE and interest rate suppression.

    Higher home prices = more money for homeowners = more spending = higher GDP.

    The only losers of inflationary policy are the non-asset holding lower classes. And they were already on the bottom. so what changed? They will benefit from more jobs, more handouts, and overall better quality of life.

    • Barrett 12 months ago

      Higher home prices are like inflation. It isn’t helpful if the growth is excess, and leads to no actual improvement in quality. You can’t even sell in a big city and move the suburbs, because they cost almost the same after fees now.

      This is the very definition of a bubble.

    • Average Man 12 months ago

      There are a ton of people who are earning what used to be middle class or even upper middle class wages who are now priced out of home ownership unless they want to be dangerously house poor. So no, it’s not just the “non-asset holding lower clases” (what a messed up phrase, btw) that are hurt by this.

  • Kolf 12 months ago

    Well, we need to look at this in more detail. Yes we built lots of houses, however are they houses off to a far corner of the city in a suburb or is it core real estate? Even if housing is to crash the prices for a downtown core real estate probably wont crash because large lot properties near downtown core will never be built again.

    • James 12 months ago

      Houses “far off and in the corner” are rising. City home prices are falling.

  • Dennis K 12 months ago

    I’m glad somebody of authorit’ finally had the sense to look into the ‘supply problem’ argument, and recognizing that it doesn’t add up.

    In my own research looking at the 20 year period since year 2000 (the time since home prices out-accelerated increases in median incomes according to the Bank of Canada), there was about 3.48 million housing completions nationally (CMHC data), compared to a total population growth of about 7.15 million persons (source: macrotrends). Over 50% of the completions between 2006 and 2019 were detached houses, semis and duplexes (i.e. 3+ bedroom configurations), and assuming the same ratio back to 2000, these homes could theoretically house at least 4 x 1.74 mil = 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 place (i.e. a 1:1 ratio), it seems highly implausible that there’s a housing shortage in any absolute sense — so why the price surge?

    And how could anyone explain the run-up in prices beyond median (working) affordability – a march the Bank of Canada itself stated in 2015 has been on going since year 2000 (an increase in the price to income index of 50%)? Sounds like something else is at play that real estate experts missed – maybe they’re not looking to ask whether the ‘demand’ is actually rational, reflecting the additional burden of ‘non-essential’ buyers in the market, including the influence of foreign capital and excess (short-term) liquidity.

    It’s amazing to me that real estate experts have been pushing the ‘supply problem’ argument for so long and getting away with it – see 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.”

    And that note issued by one of the Bix Six banks regarding the G7 per capita argument – I’ve read it, and it makes some serious assumptions that it does not back up – such as the one regarding differing demographics which Mr. Kavcic mentions. My view is that it only looks at one piece of data, and nothing else (i.e. refuses to look at the broader context). I wrote to the author of the note, asking for their raw data, and never heard back.

Comments are closed.