Canadian real estate demand has never been higher. That demand is the main problem driving house prices up, according to MET senior economist Robert Kavcic. He rejects the supply shortage story and argues that inventory levels are robust. Extremely low interest rates simply stimulate too much demand. It will eventually end as soon as the central bank wants it to stop.
Canadians are buying homes in record time
Canadian real estate demand has risen, driving home prices with it. BMO estimates that house price growth is between 25% and 30%, a huge number. A shortage of inventory is often cited as the reason, with home buyers having a lot of competition for every offer they try to buy.
BMO continues to argue that this is due to strong demand and that it is not an inventory issue. They want investors to consider the following points before getting into the story:
- The number of home starts rose to above 300,000 units in November.
- Home delivery is at an all-time high.
- The number of advertisements for existing homes is higher than before the pandemic.
Inventory is almost a record high, people just never bought houses again. Since 25% of that demand comes from investors armed with mortgages that are below inflation, there will never be enough supply for the level of demand. Once those dynamic changes and rates pick up, the pressure on supply should ease as it wouldn’t be as beneficial to investors.
Canadians spend twice as much on resale of existing homes per capita
There are a few data points that show how much excess demand is stimulated by an overly lenient policy. BMO dropped one a few days ago, it is estimated that the Bank of Canada stimulus drove so many home sales, only the surplus is the equivalent of 6% of GDP.
Today they have another one – per capita resale transaction values. That is, they want to measure the growth of the dollar volume for housing in relation to the population growth.
“On a real per capita basis, the value of last year’s resale transactions is now around $17k per Canadian person aged 25 and over, which is outside the corresponding chart,” Kavcic said.
Source: BMO Capital Markets.
The chart shows just two years ago, before monetary policy went haywire, the value was half the current amount. Even assuming continued growth during the pandemic, the current level is well above trend. Values would have to crash as much as 30% to return to the growth trendline.
The bank recently said the excess home sales and price increases will not last forever. But they warn it will take as long as the BoC wants it to take.