One of the country’s top economists is calling bullsh*t on the supply-price narrative. BMO chief economist Douglas Porter sent a client note disputing an inventory shortage. He thinks it’s important to “crush” two myths about Greater Toronto’s blowout home sales in March. Let’s dive into that take.
Myth 1: Last March Sales Were Distorted By The Pandemic
Greater Toronto home sales had a rocketship strapped to them, and many are dismissing it as a data skew. The assumption is the pandemic slowed home sales activity in March 2020. A low number in March 2020, would mean the 12.3% year-over-year increase appears stronger than it is. Porter wants people to understand that is definitely not the case.
Last year things were very busy for a month where a pandemic was breaking out. He said, “sales and new listings were surprisingly normal in March 2020 (before falling off a cliff in April). Activity in the latest month was incredibly strong by any metric.”
In fact, the sales in March 2020 were some of the strongest on record. “Sales were higher than any prior month, topping the previous record high in May 2016 by 21%. Listings were the second-highest for any month, behind only May 2017.” For context, May 2017 was the month after Ontario implemented a non-resident home sale tax.
Greater Toronto Home Sales To New Listings
The number of new listings, compared to home sales.Source: TRREB; Better Dwelling.
Myth 2: Home Prices Are Increasing Due To A Lack of Supply
High home prices are being attributed by many as a result of a shortage of supply. After all, supply and demand is the primary creator of prices, right? If you want home prices to fall, supply just needs to rise above the level of demand. Everyone who’s taken Econ 101 feels the need to constantly explain this for some reason.
“How to put this politely? WRONG,” says the noted economist that probably doesn’t need you to remind him of what you learned in Econ 101. He found new listings for homes in Greater Toronto are actually much higher than usual. “New listings in the past six months have been running 30% above year-ago levels (ie the pre-pandemic pace).”
Supply and demand-driven price growth only works with rational players. Currently, market mechanics are broken due to panic-driven purchasing. Fear is not a fundamental. “The only way in which supply is weak is in comparison to white-hot demand,” says Porter.
Before the complaints about Porter being anti-supply, he’s been very pro-supply. He has been banging on the supply drum for the past decade, especially in Greater Toronto. He has on many occasions said real estate price growth has been driven by a supply shortage. This time is different.
The economist is joining others in saying this is exuberance driven. In an exuberant market, it doesn’t matter how much supply appears. It will be crushed by the fear of missing out on price gains or being locked out of the market. This is a panic-driven hoarding spree, started by the Bank of Canada. It’s more like toilet-paper hoarding than it is an issue of a supply shortage.
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