Canadian Real Estate Prices To Correct After Immigration Cuts: BMO

Canada delivered its biggest affordability measure in years—shrinking its population. That was the takeaway from a new report from BMO Capital Markets this week. The bank has repeatedly warned that promises to triple the new homes built and create affordability with supply, weren’t grounded in reality. Now that Canada is quietly acknowledging this failure, they see real affordability on the way as scaled up building meets a shrinking population. 

Canadian Real Estate Prices To Correct With Immigration Changes

Canada is pulling back on immigration after a disasterous attempt to use it as stimulus. Building on top of this year’s reduction to temporary residents such as foreign students, the country will see state-mandated de-growth. For the next two years, the population will shrink in a attempt to stabilize housing after policymakers’ promises to triple homebuilding fail to materialize.  

“You’ve heard us for years pushing back against the narrative that Canada needs to triple the rate of housing construction. That was partly because it’s just not possible; and, mostly because the demand curve is what was really running amok,” explains Robert Kavcic, senior economist at BMO. 

Source: BMO. 

Kavcic has long maintained there was no supply problem until recently. That problem was manufactured by policymakers in an attempt to boost home prices. A problem they periodically remind us of, despite flip-flopping on affordability.

“Changes to Canada’s immigration targets announced Thursday are the second prong of that demand curve (BoC rate hikes were the first, which cleaned out speculative froth). An implied slowdown in population growth from above 3%, or more than 1.2 million people, to around zero, is going to have a very real and very quick impact on housing costs, especially rent,” he explains.   

Canadian Real Estate Was A Demand Issue, Not A Supply One

Policymakers are now acknowledging it wasn’t a supply side issue. They originally attributed the rise in home prices to regulatory hurdles. Lifting those measures boosted land values, actually reducing the amount of building. To mitigate this, taxpayers pumped hundreds of billions into state-backed loans and stimulus to incentivize developers, to no effect. 

“While well intended, the host of supply-side measures (e.g., building multiplexes in detached neighbourhoods) will look trivial when stacked up against moves in the demand curve,” explained Kavcic. 

Adding, “The takeaway is that policymakers have seen the light, and we’re on our way back to normalizing the housing market and affordability situation. It’s just going to take time given how far out of line we got.”   

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  • Reply
    Trader Jim 3 days ago

    No mention of Stephen’s piece on the CMHC’s internal discussion acknowledging more supply was never going to create more affordable home prices?

    For those that didn’t, more supply means more demand and higher material costs. The CMHC acknowledges higher prices are needed to make more supply, not that more supply will bring prices lower which is what he was saying the whole time. The CMHC was only willing to acknowledge it in private.

    https://betterdwelling.com/canadas-cmhc-internal-messages-show-housing-supply-narrative-is-bs/

  • Reply
    JMK 3 days ago

    Recent reader and I gotta say, refreshing insights. MSM manages to only praise their preferred politician, lectures us that discussion of immigration is “r!cist,” and then tells us home prices can only go up—like home prices in Canada are in a vacuum and immune to physics.

    Not what I’d expect from an outlet of non-white journalists.

    • Reply
      Ethan Wu 3 days ago

      Not that I think the point of your post was about framing their journalists an immigrant news source, but I’ve seen 3 employees in their videos—2 white guys and one asian (Phillipino maybe?).

      Superb content and I’m sure your comment wasn’t a racial one, but just thought I would clarify they don’t seem to have any cultural or political alignment.

  • Reply
    Chico 3 days ago

    What a crock of s#$% too little too late.

  • Reply
    GTA Landlord 3 days ago

    For those that don’t know (BD is well aware), demand and rents aren’t directly related despite the claim. Perceived demand is what influences people—rents rise because landlords and consumers believe the demand increases. In Toronto rents are rising and vacancy is higher than it’s ever been because the perception is there’s so much demand everything is just emptied out.

    The BOC said perception is an important influence when it comes to inflation, possibly the most important. Statistics Canada then changed how they measure rents, and suddenly they ripped higher—creating a circular feedback loop. Rents started ripping because landlords were being told this new model shows that landlords are charging more.

    Ask landlords in Toronto though. It’s almost impossible to find a tenant at last year’s rent or command even the equivalent of mortgages without parking.

    • Reply
      Mortgage Guy 3 days ago

      Guessing that’s why they’re rushing to flood the market with cheap mortgage credit too. Gov already bought the bonds to push mortgage rates down and there’s no actual demand for it. Bizarre stuff.

      BOC says more credit leverage raised prices for 30 years since it allows buyers to more easily absorb price hikes. Kazaam! Taxpayers are now subsidizing cheaper loans with extended amortizations to boost home prices.

      Not saying prices will rise (falling rates accompanied the last crash), but I can say with a fair amount of certainty that Finance Dept consulted with the BOC and the fact they aren’t independent shows.

  • Reply
    Eric D’Uva 3 days ago

    My parents bought me a house but it’s not fair that the prices of housing will drop. Canada needs higher prices for a strong economy and Trudeau promised to protect the house prices. Homeowners should be supported and the government needs to step in and help them out for the sake of the Canadian economy

  • Reply
    Broker Bob 23 hours ago

    Definitely the huge increase in immigration along with foreign buyers and investors caused the stratospheric rise in prices. All central banks in the world completely screwed up by setting interest rates too low for too long which mostly caused the investor craze gobbling up huge amounts of supply.
    Now, at least in Canada, Tiff is panicking because the economy is stagnant and unemployment is rising so they are lowering the rates too fast and too low again.
    Who saw that coming! Just about anyone with common sense knows they are going the wrong way again.
    There is no doubt that central banks cause most of the huge increases in housing around the world.
    If the Canadian government would wise up like most other countries and really clamp down on dirty money flowing freely into our market prices would further fall : probably significantly.

  • Reply
    Scott 3 hours ago

    One thing’ a for sure. McKinsey Consulting won’t win any Nobel prize for economics. Can’t believe we paid billions for this advise…

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