Supply Fixing Canadian Real Estate Is Like Using A Squirt Gun On An Inferno: BMO

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.

15 Comments

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  • K jack 9 months ago

    I’m not sure if the subject was dealt with in an earlier piece, but what about an explanation demand vs quantity demanded (and S) and how government policy as well as monetary policy shifted those who wanted to buy a home into the group of being able to actually make the purchase? It seems that, going back several years(decades?) that policies to make it easier to purchase a home turned those who wanted to buy into those who could buy, and increased the pool of buyers for what was available on the market, thereby driving up prices. Making things “easier” – I see similarities to pre 2008 US and “everybody gets a house!” Are we finally reaching that tipping point?

  • RM 9 months ago

    I genuinely hope BMO understands how much people appreciate this level of honesty. It’s been so frustrating watching all this unfold for the last seven years and thinking you’re crazy because no one seemed to be acknowledging that it was happening. Even if this is just a branding exercise for BMO, I’ll take it.

  • Scott 9 months ago

    This is not unplanned. It’s become obvious that the federal government was advised by BOC et al, that rates would have to rise. 1/3 of pandemic spending was not pandemic related which helped stoke inflation. But the PM needed an election victory so it was more important to pretend everything was hunky dory. The election cost a lot more than 600 million dollars. My unborn grandchild will likely be paying this mess of. If Canada even exists anymore…

  • Marko 9 months ago

    While the housing price issue is obviously not black or white, it sure is a lot easier to say the government should have addressed the demand side when you already own a house! What would BMO suggest? A new, higher stress test that would lock out even more first-time home buyers?

    There are still people who would like to buy a home and can’t land one because the competition is too high. That’s not their fault so why punish them further? Record builds or not, we need more houses on the market to meet the demand.

    Why not incentivize current home owners, who are reaping the benefits of rising prices, to sell? Maybe a special property tax that goes to renters to spread the pain out until prices fall? That’ll have to happen sooner or later as the demand side continues to take care of itself as more and more potential buyers (i.e. young people) get priced out completely.

  • Common sense 9 months ago

    This is complete and utter jiggery pokery from the banks. They want to eat their cake and have it too. Even though they are raking in record profits the easiest way for banks to make more is by getting us duped into raising interest rates. The markets are on fire for many reasons, chief among them are supply issues. Raising rates will do nothing to reduce demand, it will just make housing more expensive for the generation that is just now getting into the job market during the 2008 financial collapse, decades of inaction by multiple levels of government and then Covid. Making matters worse, the largely well off and well established boomer generation has decided that they want to “age in place” and rather than downsizing which would make family housing stock available to the market they are hanging onto their properties. The feds have a huge roll to play in this as well and they need to limit foreign ownership and property speculation as those are the chief drivers of property inflation. Provinces need to start limiting rent increases to stop renovictions. Air BnB also needs to never be a thing. The only thing interest rate increases will accomplish is padding banks bottom line.

    • RW 9 months ago

      Higher interest rates only improve a bank’s profitability if credit and the size of it are growing at the same rate after they’re raised, which isn’t possible.

      Interest rates were 1.75% when the economy and unemployment were last growing this fast and people think home prices have nothing to do with interest rates being 0.50%.

    • FlipG 9 months ago

      Air BnB owners who do not live in the property they rent should be subjected to the mill rate and all other property taxes federal, provincial, municipal… and all other levies, taxes, fees, inspections and requirements… hoteliers are subjected to. If they already are new taxes should be invented.
      AirBnB real estate investors destroy true rental stock and negatively impact livability for “the locals” in every habitable tourist destination.

  • Julian 9 months ago

    I have no idea why people don’t think supply is an issue. Try finding a vacant rental, vacany rates are very low, days on the market for sold homes is very short, listings to sales ratio for homes is very low, preconstrion sales sell out in weeks, the on the ground indicators that there is shortage of housing are endless. BUT, my guess is the statistics the Bay St. bankers look at are different and while they collect there million dollar pay packages they have become detach from what is actually going on at street level.

  • Arman 9 months ago

    While I agree with most of the assertions, the writer has not looked into the changes in pre-covid supply supply, principally that homeowners between 55 and 75 are very under-represented in the cross section of sellers. I believe (based on following a number of interesting authors and polls) that they do not have an option to “buy better” and secondly, there is a good chance that they have one or two of their children living with them which greatly complicates the process of selling.
    I look forward to a follow up article that examines the influence of the shifting demographics on the supply of resale housing.
    Thanks for your thoughtful writing

    • Patiently Waiting 9 months ago

      Hi Arman. It’s my view that most homeowners are stuck where they are because the cost of selling and buying are extreme. Between the realtor fees, land transfer taxes and lawyer fees, upgrading even downgrading can take a huge bite out of a homeowners equity.
      What would be essential to getting more home owners to sell is lowering these costs so one doesn’t take such a big hit.

      Of course, ensuring we have more completion in the cellular industry is much more important. Realtors making tens of thousands of dollars for a weeks work isn’t front and centre. Maybe it’s time to challenge that monopoly and make it as easy as possible for someone to buy and sell?
      Everyone should be writing their MP’s and get some competition in this area.

  • Dennis_K 9 months ago

    I like this article if for no other reason that there’s a banking expert in the room who sees the affordability crisis for what it is. For anyone (including politicians) that think the affordability issue is simply a supply problem, in addition to reading BetterDwelling regularly, I suggest they look at the September 13, 2020 on-line Globe and Mail article entitled “The ‘supply crisis’ in Canada’s housing market isn’t backed up by the evidence” by Professor Josh Gordon for an excellent summary on the topic. As it’s stated in the article: “Yet that peer-reviewed research is dismissed or ignored by advocates of the supply narrative. In fact, the case for the supply narrative is so weak that, after several years of research in this field, I have yet to encounter a single academic peer-reviewed article which documents a substantial causal link between supply-side factors and housing unaffordability in Canada.” As stated more than a half-year ago, BMO’s senior economist Robert Kavcic suggested more focus be placed on the demand-side of the issue, given that Canada has never before seen the rate of housing completions we have recently (see the August 18, 2021 BD article ‘Canadian Real Estate Needs More Focus On Demand-Side Issues: BMO’).

    Even the Australians know that just simply increasing supply is not the solution; as the Assistant Governor of the Reserve Bank of Australia stated late last year (November 2021): “There’s no example in Australia, or internationally, where supply expansion on its own [has] generated house pricing declines of a similar order of magnitude to the kinds of cycles in house prices that we’ve seen in recent years.” To me, other factors aside from absolute ‘supply’ are at play – i.e. NON-ESSENTIAL DEMAND & EXCESS LIQUIDITY, in all their forms. Non-essential demand is speculators, reno-flips, ‘investors’, corporate entities, ‘trusts’ and people using real estate to hide money – anyone who doesn’t live and work here, and also doesn’t need a principal residence.
    Excess liquidity is easy / cheap credit, bank of mom & dad, any capital unrelated to working (& paying taxes) in Canada, and laundered money as well as tax avoidance schemes.

    We know that home prices have out-accelerated median incomes since at least the year 2000 (source: Bank of Canada presentation to the Canadian Association of Business Economics, August 2015). Previously, prices were typically 3-5x’s median incomes, but now have ballooned to 8-13x’s as much (or more). The National Bank of Canada Housing Affordability Monitor dated February 3, 2021 clearly demonstrated the extent of unaffordability (over a year ago), by showing the amount of time it would take persons with median household incomes just to save for a down payment, based on the median home price in their metropolitan area (& assuming no pre-existing debt). It’s 289 MONTHS in the case of Toronto. The latest NBC monitor (2021 Q3) shows its even become WORSE since then (i.e. 330 months in the case of Toronto). And that’s just for the down payment; not the mortgage!

    For anyone who really thinks we can ‘build’ our way back to affordability, I wish they would ask themselves this: how much do we need to build, of what type and where, for prices to DECLINE back down to the realm of median affordability? It means we would need to effectively OVER-BUILD by at least 40-50% for prices to decline down to that extent (given the differential between incomes and prices indicated above). That’s alot of ‘over supply’ that would need to be made available for prices to actually drop. But who in the real estate development / building / financing / sales food chain would want to see that happen? None, of course – that impacts their profits. After all, what manufacturer ever builds more than they can sell? As a September 15, 2021 article entitled ‘Federal election 2021: More supply won’t solve Canada’s housing affordability crisis’ states, ” … if total supply increases to the extent that prices do fall, developers can always slow down the rate of new construction.” Who says that they haven’t been doing this all along? Claiming ‘slow’ approval processes is a very convenient way to side-step an examination of this question, as well as claiming development charges are excessive (but where nobody who claims this can explain why prices have gone parabolic for re-sale housing as well – to which these charges don’t apply).

    The real estate industry lobbyists simply turn a blind eye by not asking a simple question: what is this ‘demand’ they speak of, based in? Have they asked if the demand is ‘rational’ — meaning, is it only people who live & work in Canada, and need a principal residence, the ones who are buying (and have been doing so since at least the year 2000 – the approximate time the BoC itself indicated in 2015 that prices were out-of-step of median incomes)?

    We simply can’t ‘build’ our way back down to median affordability — in as much as there continues to be non-essential buyers in the marketplace, along with excess liquidity, and an industry who has a vested interest in keeping supply tight (relative to apparent demand) & prices as high as they are.

    • Conor 8 months ago

      This is very well said

      • Dennis_K 8 months ago

        Thanks Conor; much appreciated. Just wish it would have made it to and impacted all of our regulators and elected officials.

  • Omar 9 months ago

    Imagine if the supply narrative made sense? Every politician is saying they won’t let prices fall but more homes will bring prices down WHILE BUILDING MORE PLACES PRESSURE ON SUPPLIES PUSHING PRICES EVEN HIGHER.

    It’s actually very funny to watch.

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