Great news! The chance of a housing correction increases enormously and people can lose a lot of money, but the banks will make it. That was an important takeaway from Bank of Canada (BoC) Deputy Governor Paul Beaudry today. Seriously.
In a speech to the OSC, the central bank warned that Canadian real estate has seen a surge in investors. This has driven home prices much higher, sending even more investors into the segment. It’s a vicious circle, with house prices now only going up because people think they always do. The deputy chief said this may increase the likelihood of a correction, but the financial system can handle it. And really, isn’t our primary concern how the banks are doing?
Canadian real estate investors doubled their market share
The BoC presented new data showing a surge in Canadian real estate investors. Their calculations show that annual growth in investor purchases doubled in the second quarter of 2021. In contrast, first-time homebuyers rose by less than 50% over the same period.
This is not entirely surprising. Last month, land registry data showed that Ontario investors have skyrocketed. The new BoC data confirms that this is a national trend rather than a regional one. It also takes the story of new buyers driving this market behind the shed.
Home purchases by investors have increased more than other home buyers during the pandemic
Year-on-year growth in the number of new mortgages by type of home buyer (percent).
Source: : TransUnion, Canadian Bank Registrations and Bank of Canada Calculations.
“A sudden influx of investors into the housing market probably contributed to the rapid price increases we saw earlier this year. In such a case, expectations of future price increases can live up to themselves, at least for a while. That could expose the market to a greater chance of a correction,” Beaudry said.
Investors, crashes and lying about occupation?
The BoC chose an interesting document to quote: real estate investors, the leverage cycle and the housing crisis. Written by the US Federal Reserve, it argues that investors bolstered home price growth in the 2000s. By doing so, they created much of the pressure that created the US housing bubble.
The bubble bursts when these investors can no longer propel the market upward. At that point, they begin to withdraw support from the market and help it capitulate. The last point is worth chewing on as investors have moved into stocks.
The US Fed is proposing anti-speculation policies to target investors as a way to lower risk. Although they also found that investors lie about the occupation of their homes. This would make it extremely difficult to target them. As long as incentives exist, people will find a way to get around the rules.
Falling house prices in Canada would not cause a financial crisis
Most people think that falling house prices could lead to a collapse, as the US saw in 2008. However, the global financial crisis was not a correction in the housing market, it was a failure of the system. House prices fell, but they did with the general collapse of the economy.
The BoC deputy governor doesn’t see that happening. If house prices fall, he is convinced that the system will prevent a financial crisis. This is an interesting distinction that the central bank has pointed out today.
Not because the BoC recently said that hubris in the system created moral hazard. The mere fact that they have to explain that falling prices is not a problem is rather strange.
“None of that means there is a calamity on the horizon. The financial system as a whole is in good health and generally quite resilient. Nevertheless, a fall in house prices can have a significant impact on household spending, impacting employment, even if it does not endanger the financial system,” he said.
It’s just less money and higher unemployment. The good news is that your bank will be fine.