One of the biggest red flags for Canada’s real estate bubble is that banks have become prominent critics. BMO chief economist Douglas Porter reminded clients this isn’t a supply issue. The bank warned last year that price growth would accelerate without demand measures. Instead of taking that advice, policymakers doubled down on the supply narrative. After a year of delivering a near record supply of new homes, price growth is almost double the rate of last year. Canada has never seen anything like this.
BMO Warned Demand Measures Were Needed Last Year, Maybe Sooner
Canada’s oldest bank has been an unlikely critic of the country’s lack of action on real estate prices. About this time last year, home prices were already considered out of control and in need of measures. “We believe policymakers need to act immediately, in some form, to address the home price situation before the market is left exposed to more severe consequences down the road,” said Porter.
BMO warned it would have been too late to cool the market last Spring. Policy measures to contain demand could have prevented accelerated price growth though. Policymakers instead doubled down on the supply narrative, much to the industry’s applause. The political platforms parties ran on even went further on the promise to stimulate demand. It was hard to find a notable economist that didn’t say this plan would raise prices.
He adds, “… some others suggested that the market would calm, and that there was no need for haste, while others focused entirely on the (slow-moving) supply side to address what was clearly an acute situation.”
Canadian Real Estate Prices Are Accelerating With Rising Supply
And so begins the story of how Canada didn’t correct course, but threw gasoline on the fire. According to CREA’s latest data, home prices showed annual growth of 29% in February. It was already a problem last year, and now it’s less of a government concern than when it was at half the rate.
BMO highlights existing homes may be tight, but that’s far from the only supply. New housing starts nearly hit the record, and completions almost hit a record too. New construction starts and completions are still trending much higher than pre-2020 levels.
“As it stands now, prices are going parabolic across a number of markets, and the price strength appears to be feeding on itself… So, even with a formidable supply response, the near absence of serious measures to contain demand has allowed prices to run wild,” writes Porter.
Supply Is A Small Part of The Issue In Canada
As for supply, the bank isn’t saying stop building — it’s saying it won’t solve prices when the market is this far gone.
“By all means, we need to support supply. But that’s like bringing a squirt gun to the raging inferno of demand, which is being fueled by expectations of further price gains,” he says.
If it wasn’t clear, this is one of Canada’s largest banks with a vested interest in seeing higher prices. The incentive for them to benefit from more and bigger mortgages is clear. That’s how screwed up the situation currently is. Even those who stand to profit from the current market are worried about systemic issues.