Canadian real estate prices are unique due to how expensive it has become, but not when it comes to recent price growth. BMO chief economist Douglas Porter explained, once again, monetary policy drove prices higher. Central banks adopted “hyper-stimulative” policies to drive excess demand to push prices higher. To illustrate this, he contrasts Canada with other global real estate markets. Prices are at various levels of affordability, but price growth accelerated after monetary policy changes in 2020.
Central Banks Have Been Driving Record Home Sales
Central bank stimulus has driven record demand for housing at a turbulent time. Not just in Canada, but across countries with similar fiscal and monetary policies. All of these countries are now seeing existing-home prices surge at one of the fastest rates ever. Rather than adjusting stimulus set two years ago, many of these countries tried to cash in on easy growth. Record demand sending prices soaring during a recession? Maybe we just need record supply?
It might make sense at a high level, but doesn’t when you dive deeper into it. These policies, such as quantitative ease (QE) are designed to create price inflation. Supply was never meant to catch up, since these policies are designed to raise prices. “While the supply brigade is prepping the horse and buggy to chase down the market, demand has already taken it away in a Lamborghini,” said Porter.
Adding, “And we will note that the surge in home prices in the past two years is a common feature among many major economies.”
Home Prices Accelerated In Countries With Similar Monetary Policy
To highlight this point, BMO shows how this trend looks across various countries. Australia, the Netherlands, and the US all show elevated growth after 2020. Canada has seen annual growth higher than all of these markets, almost 10 points in some cases. However, all four markets show a distinct acceleration in price growth after 2020. This is when the rollout of the hyper-stimulative policies began.
It should be noted that price growth accelerated simultaneously, but these markets aren’t equal. The price-to-income ratio in the Netherlands (148.3%) and Canada (141.9%) makes them the least affordable countries in the world. The US (130.5%) and Australia (115.8%) show considerable price growth, but aren’t even in the same league. Though the US Federal Reserve now considers the US a real estate bubble as of last year.
Hyper-Stimulative Policies Drove Prices Higher
During every price surge, there tends to be a supply shortage, but it’s not necessarily due to a lack of supply. At least not to the extreme that would justify 20 to 30 percent annual growth. Lowering interest rates incentivizes buyers to pull their purchase forward. Existing buyers then have to compete with the new demand. This creates an inventory squeeze, pushing prices higher very fast, absorbing excess credit. As prices rise, various distortions like buyers’ gridlock and FOMO are created.
Seller FOMO is an issue BMO has brought up before. It’s when owners won’t sell due to the price of their home rising tens of thousands per month. Who would? Their home is making more than they do at their job. Obviously in this scenario you would have as many homes as possible. This turned the property ladder into a leverage ladder.
Owners aren’t letting go of their excess property, they’re hanging on and using it as leverage for a second or third property. This exacerbates inventory problems even further. All of a sudden, people with million dollar mortgages can’t find a home. Investors are now a larger segment than first-time buyers, which just highlights this trend.
“Do you think that each and every one of these markets is dealing with an overriding supply shortage? Or do you suppose there is a more common set of demand factors at play—like hyper-stimulative policies and hefty pandemic savings? If you believe the former, then we better get to work on zoning policies in Dublin, Wellington, Sydney and Cleveland as well,” said Porter.