Canadian Real Estate Price Psychology Can Change Fast If Price Growth Slows: BMO

Real estate investors were cautioned that risk happens fast, from Canada’s oldest bank. BMO Capital Markets warned clients to expect the housing market to “be tested.” Higher interest rates and the end of “too loose” policy are expected to cool price growth. In frothy real estate markets, sentiment can shift very fast when prices slow, and the FOMO fades. If that’s the case this time, expect fewer buyers and more inventory. 

Canadian Real Estate Prices Have Been Rising Even Faster

Canadian real estate prices surged higher with Toronto being the latest to report. In February, a typical home (aka the benchmark price) saw 35.9% annual growth. BMO also cites Vancouver and Calgary as additional examples of price growth acceleration. This is on top of already lofty gains seen for the past two years. “On an annualized basis, price growth is running at around a 50% rate more recently,” says Kavcic.

The End of “Too Loose” Policy Will Slow Home Buyers

Low interest rates have supported Canada’s high home price growth, and that’s coming to an end. As interest costs fall, buyers can support larger budgets that cut less into cashflow. It also pulls forward future buyers who are now incentivized to buy early with cheap debt. Existing buyers with bigger budgets and increased competition is a recipe for price growth. With the first rate hike of several this year, these conditions will reverse.  

“Now the test begins,” he says. “This is a market that has run ahead of itself because of too-loose policy and buyer psychology. Fundamentally, we probably need at least a few more 25-bp rate hikes to see the market slow meaningfully. But, as shown in 2017, psychology can change quickly the minute price expectations change.”

For those unaware of BMO’s reference to 2017, it was the last time interest rates began to take off. With the help of other policy tools, tight markets like Toronto and Vancouver saw prices drop. All of a sudden, inventory started to appear. Lofty immigration targets used to justify rapid price growth didn’t matter. That is until 2019, when the mortgage market got a little stimulus and went on roids in 2020.

Investors May Be Deterred, But Home Buyers Unlikely To Suffer

Slow price growth may erode investor demand but won’t be catastrophic for homeowners. Interest rates are normalizing fast, but mortgages would still be affordable. Lower incentives and short-term profit potential fading, is only an immediate issue for investors. There are a lot of investors in Canada though, representing over a quarter of demand. 

“Canadians also have capacity to handle higher rates, and they’ve been stress-tested accordingly. But there’s little question that there is some froth to clean up…”



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  • Remington 11 months ago

    The real question is how are these people obtaining these mortgages. Banks are turning a blind eye to what’s really going on.

  • C.Rose 11 months ago

    Don’t yell fire in a crowded theatre- that exit door becomes very small. I see a little flicker over there in that corner ( listings seem to be rising fast in my neighborhood- just my observation).

  • Stella Chan 11 months ago

    House prices will rise then rates will rise / rates will rise more then houses prices will drop.

    Long term detached homeowners have no fear. Immigration the likes we haven’t seen in two years and migrants this time from the Ukraine will force the City or the Province not change zoning regulations!

    Prices for detached homes will then rise some more and we can all choose to cash out or wait for the next cycle. The young people used to have “more good years” left than the older people, now the young people just have more years left to try to make us a socialist country and take our detached homes away and keep the profits for their socialist agenda!

  • Stella Chan 11 months ago

    This is a beautiful blog. No dissenting opinions and please tow the line 😊
    Was the word “socialist” offensive?

    If the government wants to take perceived profits (non realized – risk assumed fully by mortgage carrying homeowners, and share that profit (interest rates could have gone back up to 18% as they were in early 80’s), and the government would have just watched homeowners lose their homes, with those who assumed no such risk, then that is socialism!

    Our homes are our pensions! Laneway houses are not “hidden density” they obscure views from homeowners and lead to unlawful parking in alleys.

    The idea of single family properties now having up to 6 units sounds like a great idea given the Pandemic and masking restrictions and restrictions on the number of people one can have in their own home!

    Homeowners need not sell if this is the mentality of our governments. Who wants a government forcing a homeowner to have below market rentals on their property (other than those who don’t own homes), and who want more for less!

    We didn’t get an education: scrimp and save, work two jobs, assume mortgage risk, maintain our properties and provide suites for Tennant’s at fair rates to have “Big Brother” decide that they can dictate what “is best” for “us”.

    “The poor will always be with us!” The common idea these days is to bring us all down in an effort to bring the bottom up!

    The government can not mandate “good landlords” and can not mandate a social conscience for those who don’t already have one! Forced tithing in the form of stripping profits from “Principle Residence” homeowners is social engineering, it is akin to giving drugs to those who are addicted rather than providing treatment options.

    What politician would be alright with the government giving their children drugs? This does not help people it turns them into zombies! What landlord wants people who live off the public purse for Tennant’s? If a person can work they must work in order to build character and responsibility!

    Nobody I know was given a house! Every homeowner I know obtained their house the old fashioned way, they earned it!

    Every homeowner should have the right to pass that “perceived wealth” onto their children without being encumbered by socialist ideas that talk about a “false” inequity.

    Walk through any neighbourhood in Vancouver and tell me that “racism” is / has been a factor in this century or the past 50 years or more with respect to where people live!

    Every person should be treated with dignity and respect, however, once any group is elevated to “victim” status and given preference treatment the system becomes broken irreparably!

    “Any man’s demise diminishes me!” We should work to build an inclusive society based on mutual respect and value the dignity and sovereignty of each person, we have all been victims and subject to racism but we didn’t all receive or want preferential treatment! Look at the Irish who came to North America and were greeted with signs in storefronts (the visible discrimination), stating “no dogs or Irishmen allowed” !

    A full 2/3 of all people who died in the American Civil War were Irish who were conscripted as soon as they stepped off the boat and it wasn’t uncommon for two members of the same family to be forced to fight on different sides!

    What if the discrimination and theft of lands by the English from the Irish Catholics and forced food shortages (while they fed their own soldiers) which forced the Irish to flee! What if the “sunlight tax” on every window that the Irish had to pay their landlords! What of the cultural genocide by the English and the crushing of the Irish language in schools and homes!

    That is one example of a people who suffered but don’t fall neatly into the stereotype of discrimination and racism that suits the talk of the day!

    Every person must be treated with courtesy and respect valuing the dignity of human life and no people or race should be given preferential treatment, not in housing or in life!

    A person whom has worked hard to own a house should not be abused or dictated to by the government and then have their pocket picked by a government rather than being able to fund their own child’s education, their children’s housing if able, and last but not least have their prospect for retiring in comfort (because they do t have a government pension), be reduced because of some “false equity” programs that are by their own nature discriminatory and racist!

    The groups of immigrants in recent memory whom achieved homeownership the fastest are not “non racialized”, the crazy term of the day for “caucasians” (as if they do t have a race!), they are great people who have come from. On English speaking lands (predominantly) whose culture, pride and work ethic has made, and would make the em a success anywhere!

    Good people don’t want or need a “handout” or preferential treatment they want a level playing field where they can shine and show the world how proud they are of their cultural heritage and ethnic background, and just how capable and beautiful they are!

    We are all Canadians and all equal until the day preferential treatment is given to anyone! When will the “white people” be declared a visible minority- there are fewer of them in my neighbourhood than ever before! I doubt that they want or need special treatment l, they just want what I want, a level playing field where hard work and effort are rewarded and private property rights are not abused by social engineering!

    A person’s colour or creed should never be an issue, it is the content of every person’s character that counts, nothing else matters or should be rewarded or abused!

    Every man is my superior in that I may learn from them!

  • Robert Boone 11 months ago

    Supply and demand issues are driving this , our robust immigration policies are also a determining factor here. Historically low rates coupled with the pandemic have created the perfect storm. The correction will come when higher rates curb speculation, and supply meets demand. The govt knows that if rates are increased too fast or too high they will bankrupt our economy, ergo we have a very complex problem that isn’t easily solved. Its a tightrope !

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