Canada’s busy Spring market hasn’t begun with the typical flood of sellers. BMO Capital Markets warned investors a lack of new listings for sale might be a bigger problem than low sales. They attribute this to a number of factors, but they all boil down to one issue—there’s little reason to sell. Canada is hitting property with stimulus less than one year after the market began to slide.
Canadian Real Estate Sellers Aren’t Listing As Fast As Usual
Canadian real estate sellers typically wait until the Spring market to list, but it’s so far been slow. New listings fell in both Toronto (-44%) and Vancouver (-34%) in March, two trend leading markets. Other regions have yet to report, but brokers around the country indicate the mid-month data will show sellers were scarce in every market.
Source: BMO Capital Markets; TRREB.
BMO economist Robert Kavcic warned this might be a bigger story in Toronto than a lack of sales. Addressing investors, he warned the region had the slowest month for new listings since 2001, helping to tighten the market.
Here’s a few insights he mentions as potential reasons for the slowdown:
- They don’t want to sell in a down market, and don’t have to.
- This is an asset price correction, not a recession that comes with job losses and forced selling.
- The mortgage market has a major buffer with most owners facing little to no payment stress.
- OSFI stress tested buyers, preventing forced sales.
- Cost of moving/trading is excessive, so people are staying put.
- Investors have a strong rental market to fall back on.
Buying Or Selling An Asset Requires Motivation
All great points, with incentive being the key factor behind most. In every asset market, owners will hold onto the asset for as long as they are motivated to do so. If you had a magic piece of paper that gave you $20k/month, would you sell it? Probably not. More likely you’ll try to leverage the paper’s value to get more magic pieces of paper.
A good chunk of investors are purchasing negative cash flow properties. This is when the tenant’s rent isn’t sufficient to cover the carrying costs paid, so the speculator/landlord has to top up the payments. Even in this scenario, the minor pain of topping up rents has been lucrative for investors due to inflated equity.
By hodling holding, the market experiences a distinct acute shortage, helping to push prices even higher. Higher prices mean more holding excess, which in turn leads to even tighter inventory.
In contrast, when prices are falling a sudden surge of inventory typically appears. You don’t make any profits until you sell, and it’s quite motivating to get ahead of seeing your gains wiped out. The increased inventory helps push prices even lower, increasing the amount of inventory flows. Momentum in either direction can trigger major trend changes, especially with a financialized asset.
Most people tend to look at housing as an investment, and then try to analyze its supply and price trends like a necessity. There are x number of people that need a house, so they’ll bid on y number of units. Investments don’t work that way, the price is based on the amount it can be liquidated for. It’s physically impossible to build enough “affordable” housing, since investors are looking at return potential through asset inflation.
Higher interest rates typically bring home prices down by throttling the leverage that can be used to buy. Central banks are supposed to act as a lender of last resort, responding to emergencies. Governments are only supposed to provide investment stimulus when there’s a prolonged lack of investment, not because they can. That’s not how anything has operated since the Global Financial Crisis.
When interest rates began to climb, they predictably throttled credit and brought home prices lower. However, less than a year later, Canada is demonstrating it doesn’t have the appetite to follow through on tough love. Now the market is salivating after a banking liquidity crisis reinforced moral hazard by hinting that credit stimulus is just around the corner. Add to that, the Federal government’s expansion of subsidized demand, and opening the market up to global investment days after deeming it necessary to restrict.
Investors are getting the message loud and clear—Canada can’t do much other than trade houses. It couldn’t last a whole year without applying stimulus, so the incentive to hold onto your inventory is greater than any correcting factor at this point. If your government is essentially an army of real estate investors, why would anyone sell before they do? They’ll bet the whole financial system on inflating the asset they also have a vested interest in.
As a Realtor who specializes in the field of the senior market you have missed a viable point – the largest demographic of homeowners of single family dwellings in Canada is from 55 of age and up and they are not moving. Before Covid they were planning moving down to condos or retirement communities but the pandemic and lockdowns scared them. The word “elevator” seems to be common as the idea of being in one during a pandemic is of major concern. And they learned the value of backyards. No, until we see the Baby Boomers and the remnants of their parents start to go back to pre-Covid patterns things are going to remain tight in respect to single family dwellings. Most sellers today who are senior sell through circumstance rather than choice for the most part.
Bull Trap….Time will tell.
So I guess the comments by Mr. Kavcic are saying that Canada’s home prices will remain frothy for a long time, way out of reach of median income Canadians, not even considering the current levels of private debt? How long can this be sustained? Does this constitute a good plan for social stability heading into the future?
It’s a head-scratcher to me how the respective federal and provincial governments thinking their policies on this will play out – do they really believe that by providing ‘opportunities’ (not mandates) to build more, allowing more non-essential ‘players’ into the market and making more liquidity available, really going to bring prices back down to the realm of median affordability (i.e. 3-5x’s median incomes)? Bizarre.
pretty sure the main reason for people not selling is their need to refinance at a very high rate vs. keeping their existing (much lower) rate that they obtained several years back.
The real deal. Excellent points. I wish there was a brick wall our leadership could head into.
So I guess the comments by Mr. Kavcic are saying that Canada’s home prices will remain frothy for a long time, way out of reach of median income Canadians, not even considering the current levels of private debt? How long can this be sustained? Does this constitute a good plan for social stability heading into the future?
It’s a head-scratcher to me how the respective federal and provincial governments thinking their policies on this will play out – do they really believe that by providing ‘opportunities’ (not mandates) to build more, allowing more non-essential ‘players’ into the market and making more liquidity available, really going to bring prices back down to the realm of median affordability (i.e. 3-5x’s median incomes)? Bizarre.
What the hell is the end game in all of this!????
Hyperinflation.
At this point it doesn’t look good for anyone. Rents will continue to skyrocket due to immigration. And the psychology of investors in Canada will keep overpaying for properties. Interest rates will drop and as soon as they do, even 25 or 50bps, there will be droves of investors buying up properties banking on price appreciation.
I am wondering the same thing Cto? It seems insane to me. The prices outside of the GTA continue to rise, they have not even peaked yet and most likely never will in certain parts. It makes no sense to me for houses in boggy bush, no reliable source of water or exit for it (nothing more fun than replacing a broken septic!) to cost upwards of $800,000. Ask around and most folks trying to find a house outside of the GTA will tell you that you need a million to purchase anything of proper quality. Who would have ever thought you would need upwards of a million to purchase a proper, good quality home out in bushland Ontario?? So what was up with all the doomsday articles, a market crashing, bubble popping? Were they just a joke? Another scam? And now we have articles pumping up the market again, encouraging FOMO???
The loss of everything except the rich
What is the end game to any Ponzi scheme?
We all win?
Boom!
Each policy they enact is less effective than the last. Our government is tremendously short-sighted, every brainless thing they do makes the inevitable bust much worse.
pretty sure people are choosing not to sell because they would need to refinance their mortgage at very high rates vs. not moving and keeping the low rate that they obtained several years back.
1) people not selling in a downturn is not true, happens all the time
2) this is an asset price correction leading to a recession due to such slow sales, contracting business activity
3) I just called spoke to a real estate agent selling a power of sale property – there’s payment stress..
4) OFSI stress tested buyers, but years ago and not to these variable rates
5) yes, cost of moving is expensive!
6) investors are likely negative cash flow in the GTA so it doesn’t matter if their place is tenanted or not – not being tenanted is even more negative cash flow but tenants are being financially stress themselves
There’ a lot of evidence that runs counter to what this economist is saying
While I agree with the points made in the article. However, I think the major factor that has caused these low inventory levels is the fact that banks have allowed for negative amortization on mortgages.
“why would they sell if they don’t have to”….well 20% of all mortgages at the big banks would’ve HAD to sell if the banks didn’t provide accommodations. This would’ve maybe brought houses down another 10% and then investors would’ve had a much harder decision to make.
This has been the biggest “bailout” that no one seems to be talking about. If they are talking about it, I’m confused why there isn’t more outrage! And the fact that the government is going codified it in their budget makes things even worse.
Why is it so hard to tax investors on multiple properties? A tier system like in Singapore? This will discourage investing as well as increase tax revenue for the government. But the biggest advantage is that it will finally give the first time home buyer a leg up, allowing them to enter the market.
This is an important point. Canada’s bank regulator is allowing banks to cook the books by pretending the decline in value didn’t occur in its LTV models, and preventing any actual downside.
They can’t rig the game forever, but they can rig it long enough to ruin opportunity for a whole generation.
sucks to be the family looking for a home right now
The government can’t magically make home ownership more affordable by decree. This isn’t North Korea.
Most people have learned that interest rate hikes do not change housing affordability for the reasons cited in the article.
If your dream home is out of your league, make more money. There is no other solution.
im seeing lots of houses on the market, yt channel realmedia and every day 20-30 houses in the GTA are coming on the market. the problem is when someone sells and buys another house they get trapped into the higher lriperty tax based on assessed value. if some was paying 3 k per year property tax why would they want to buy a house worth 500k and pay 5k per year.
Excellent article. 100% on point. I am quite well off and have every reason to enjoy where property values have gone over the last few years. But it is to the point I would guess most well off Canadians feel for lower income and immigrant families that can’t afford homes. It would appear our government and central bankers don’t seem to care or be able to start righting the wrongs of the last few years by somehow tempering investor demand, speculation and laundering in our residential property markets. What a backwards country we are turning into. Poor leadership by all levels of government. No one seems to have a backbone.
I think if ratings agencies decided that the 40% of Canadian mortgages that have amortizations beyond 35 years are all subprime ( like they are), then the market would implode overnight. An asset doesn’t have to be in forced sale to devalue if the fundamentals are this bad.
So, what is a rational family to do? Didn’t buy a decade ago. Never going to be willing to take on a million dollar mortgage.
Given that falling house prices are an existential threat to the Canadian financial system, government, and homeowers, there will be no further significant resets of house prices toward where they should rationally be — government/BoC will do absolutely anything to prevent it.
So, what next for us? Looks like we’ll have to keep renting another 5 years til our kids finish high school, then leave Canada for more affordable pastures. There’s no future here for them or us.
I give up – I can never compete with fools willing to take on an unlimited amount of debt just to own a home.
Absolutely correct. Like you, I refuse to be the greater fool, just as I did 8 years ago. But we never know what might happen. The 2008 crisis happened in the US and we can only hope that such a reset also occurs here.
If not, I am eyeing a temporary move down south. I have skills that are portable.
Govt providing “investment stimulus” is nothing more than a fancy name for creating market distortions.
The free market is supposed to protect the consumer, not govt picking winners and losers.
When this while thing crashes, please don’t send the mortgage defaults, bankruptcy and banker bailout bills to the rest of society. They enjoyed the profits on the way up, don’t socialize *their* loss on the way down.
Franky, glad to know we’re not the only ones who stayed on the sidelines.
I always used to think that if the mighty US couldn’t prevent a 50% collapse of some house prices, that Canada couldn’t either, but alas Canada has the special sauce the US lacks – unshakeable conviction on the part of nearly all Canadians that RE only goes up and it’s always a good time to buy, interest rates be damned.
I’ve even been cheering on the high inflation, hoping that will force some fiscal discipline by BoC and Fed, but I now feel they’ll weasel their way out of it, or at least Canada will throw the currency under the bus instead.
Super angry to not be able to purchase a home here in the LML for 3,4,5x income the same as had been done here for generations.
And we’ve already done our stint down South in software in the US for 4 years, and another 4 years internationally, but after a career change my skills are rather less portable now. So instead I’m looking at us retiring early in a lower cost jurisdiction and living off the $ we didn’t dump into Canadian real estate – a far better use than being indebted up to our eyeballs here.
I’m fifty and never bought. I always thought it would crash and it hasn’t yet. So, I’m giving up on real estate in Canada. It’s a completely distorted, propped up by government and a total mess. At these prices if you buy and it drops, you will never retire like you thought you would. Any normal and sane lender would not extend a loan of that size to the average Canadian worker. In our country however, a CMHC insurance program along with savings/finance incentives can the Canadian sucker to enslave him/herself. And when it drops, there will be some government social support program I’m sure. Forget it. All you have to do is look at US/CAD border towns: Go to Realtor.ca and check out a border town near you. Then, go to Zillow and search for the nearest US comparable housing product. Canada’s product is inflated by 2-3 times. Kind of sad to see this kind of socialism and it’s effects.