Canada’s oldest bank sees today’s real estate markets having a lot in common with the late 1980s bubble. In a research note to its financial markets customers, the Bank of Montreal (BMO) highlights the similar trajectory homes have made. A similar event that slowed home price growth during that period is approaching — higher interest rates. Once price growth slows, the bank sees people being “surprised” by how fast supply issues resolve.
Canadian Real Estate Prices Driven By Loose Policy For Too Long
Canadian real estate prices weren’t exactly performing poorly before the pandemic. There were several pressures, from money laundering to speculation, that sent prices soaring. Then the pandemic struck, and the cheapest mortgages in history added another layer.
Canada’s economy is nearly back to where it was pre-pandemic, and better in some areas. Still, the credit is nearly as cheap as it was during the worst part of the recession. Not surprisingly, this is fueling the fastest home price growth in history.
“We’re in the midst of getting January reports from the major Canadian real estate boards, and all indications are that the market today is as fevered as it has been through this whole pandemic episode,” said Robert Kavcic, a senior economist at BMO.
“It’s pretty clear that expectations of home price growth have been allowed to root for too long, aided by too-loose policy. Even OSFI is now warning about speculative activity in the market, which has long been confirmed by survey data, transaction-level data and our own eyes,” he adds.
The economist is referring to a podcast interview with OSFI head Peter Routledge. In it, the head of one of the world’s largest bank regulators called Canadian real estate a “speculative frenzy.” He wasn’t too optimistic about how it ends for homebuyers. However, he did explain the banks are more than ready for events like a housing crash.
Canadian Real Estate Resembles The ’80s Bubble
Canadian real estate investors often point to the nothing-burger in 2008. Despite a massive housing crash in the US, Canada was largely untouched. Most don’t realize this is due to the fact some cities like Toronto had not yet recovered from the 90s crash. In real terms, that only occurred around 2010. It’s not hard to understand why the Great Recession had a minimal impact in Canada. There is little to correct when home prices are still recovering from a crash a decade earlier.
Canada’s last major real estate crash was in the early 90s. BMO charted the indexed home price growth during that period, to show how similar growth has been. Then showed how those prices have moved since the start of each real estate bubble in years. “Note that the late-1980s is an infamous period in Canadian housing market history,” he says.
Ontario Average Real Estate Prices Compared To Late 80s Bubble
The average Ontario home price indexed and compared by years of growth. Index 100 = start of period.
Source: BMO Capital Markets.
“Real average house prices ballooned almost 100% in four years through 1989. The current trajectory (using January 2019 as the starting point) is keeping right on pace with that past episode, which ultimately ended at the hands of Bank of Canada tightening.”
Supply Issues Will Ease When Price Growth Does
Canada’s housing supply shortage is real, but the extent is greatly exaggerated. Especially when it’s used to justify this level of home price growth. “For the supply-side activists, the current psychology boosts demand while at the same time holding back listings,” he said.
Cities like Toronto are seeing home prices rise by the median annual income in a single month. If you own an extra house or two, and it’s making more than you do at work, you’re probably not going to sell it. Even if you’re thinking of cashing out and moving to a cheaper region, most would try to maximize their gains.
When price growth slows, the bank expects that to change. “Why sell today when you’ll get 10% more tomorrow? … When policy finally breaks this sentiment, you might be surprised how quickly the ‘lack of supply’ problem goes away,” says Kavcic.
This is off topic, but I love the pictures that are used on these articles. Would love to see a photo credit and location.
this is downtown toronto, right next to eaton center looking north on bay, south of queen
*it’s the old city house
In 1985 the average house in Toronto cost $110,000, and the average household income was $32,000. In 2022 the average house in Toronto costs $1,240,000, and the average household income is $65,000. Houses are up 1100% while incomes are up only 200%.
‘When reality finally breaks this sentiment’ Mr Kavcic ‘might be surprised’ at how this bank-enabled problem turns banks upside down. As witnessed in the US in 2008, people don’t just walk away from their houses. They destroy them first.
More so though, I hope Kavcic comes to understand how shallow and arrogant his comment is.
The real shallow and arrogant person is the one that thinks people who lost their home ruined them. All 7 million people.
The majority of losses were multiple property-owner investors. They didn’t go back to the house they bought in another state, just to trash it before foreclosure. LOL.
Yes, agree that supply issues are over exaggerated. I would love to think that there is a simple answer to correction, but there are many factors. The big one is immigration. With 400,000 coming to Canada each year and most settling in Ontario then the market demand will likely be this way until interest rates go back up. I really don’t understand why Canada is full throttle on immigration – most argue that it is needed to support our economy but Japan has an opposite stance on immigration, the country has an aging population and their economy is humming along. The more that come to Canada the more housing and infrastructure is needed, then more workers are needed, then more housing and infrastructure .. at some point this loop will break. The fear tactics of owning a home are too driven by media, builders and realtors. This bubble will eventually burst.
Meanwhile they will just go back to 2017 levels which was still over priced.
I think that’s why Canada’s per capita GDP growth is shot regardless of how it’s formed. The country is no longer able to correct the inefficiencies at this point.
Greece would be an apt comparison, except being a part of the EU forced austerity for the sake of rebuilding efficiency. Canadians would never vote to correct the issues, because it’s a painful adjustment. They would rather move towards an early grave, like a diabetic eating themselves into a sugar coma while complaining they don’t like the way insulin feels.
I love seeing charted data with a narrative, except that the recent charted data stopped in 2019.
Where is the the 90-Day+ Mortgage Delinquency Rate side by side graph?
If you guys are hawkish then the least you could do is pull recent data. And then I laughed reading “supply-side activists” no need for this kind of strong language. Just bring data on the table to see how the supply levels are.
https://commercial.bmo.com/media/filer_public/0d/81/0d81c7f4-4abb-47fe-ba2c-5087a11a2cab/cdn_housing_15june20.pdf of course it’s data from 2020 but the supply died as we entered the pandemic and the insane prices started right after.
Not sure how the Gov is hoping to keep cashing out on taxes from CPI products when people have to spend more and more of their salary and buying power into mortgages or rent. If I have to tie 2-3 weeks of my monthly income for a roof over my head, don’t count on me to go buy and consume on other stuff. At which point, recession will hit HARD!!!!!
The data doesn’t stop in 2019, it starts in 2019.
If you can’t read an X-axis label, maybe trying to debunk the top economist at one of the world’s largest bank is a little over your head.
**old city HALL!!!
Truth about Canadian real estate is the earlier you leave the idea of buying real estate in Canada the better you will be.
One way or another, USA is way cheaper compared to Darn Cold Canada.
The bubble is now so big, even a modest 25-30 percent correction may crash the market altogether, and any recovery would take decades.
This could very well lead to the break up of English Canada…
Five year mortgage rate in 1981 was up to 22.50% – a rate like that now would solve the speculator problem for a few months
In Brampton I hear all the radio stations creating a paranoia through advts from realtors and mortgage agents to rush and buy. Every home is sold over asking and I wonder bank is assesing these properies on notional growth. Its an unreal world and totally deterent to a socialistic economy like Canada used to be. Its like a 3rd world country where good housing is limited to priviledged few who could afford. Rest all will be living in rents or in dispecable living condition. The govt has to intervene and break the nexus of some people making all the money. The next generation wont forgive us for not making it nirmal.