Canadian Real Estate Doesn’t Have A Supply Problem. It’s A Demand Issue: BMO

Canadian real estate demand has never been this elevated before. That demand is the primary issue driving home prices higher, according to BMO senior economist Robert Kavcic. Rejecting the supply shortage narrative, he argues inventory levels are robust. Excessively low interest rates are just incentivizing too much demand. It will eventually end, as soon as the central bank wants it to end. 

Canadians Are Buying Homes At A Record Rate

Canadian real estate demand has been surging higher and sending home prices with them. BMO estimates the run rate of home price growth has been between 25% and 30%, a huge number. A shortage of inventory is often cited as the reason, with homebuyers facing a lot of competition for every listing they try to buy.

BMO continues to argue this is due to a surge in demand, and it isn’t an inventory issue. They want investors to consider the following points before buying into the narrative:

  • Housing starts surged above 300,000 units in November. 
  • Housing completions are at a record high.
  • Listings for existing homes are higher than they were before the pandemic. 

The inventory is near a record high, people have just never bought more homes. With 25% of that demand coming from investors armed with below-inflation mortgage rates, there will never be enough supply for the level of demand. Once that dynamic changes and rates rise, the stress on supply should ease, since it wouldn’t be as favorable to investors. 

Canadians Are Spending Double On Existing-Home Sales Per Capita

There are a few data points that highlight how much excess demand is being stimulated by overly easy policy. BMO dropped one a few days ago, estimating the Bank of Canada’s stimulus created so many home sales, just the excess is the equivalent of 6% of GDP. 

Today they have another one — resale transaction values per capita. That is, they’re looking to measure the dollar volume growth for housing, relative to population growth.

“On a real per-capita basis, resale transaction values over the past year are now running at around $17k per Canadian person 25 years and over, which is off the accompanying chart,” said Kavcic. 

Source: BMO Capital Markets.

The chart shows just two years ago, before monetary policy went haywire, the value was half the amount currently seen. Even if we assume persistent growth carried through the pandemic, the current level is way elevated above the trend. The values would need to crash a whopping 30% to get back to the trend line of growth. 

The bank has recently said the excess home sales and price growth won’t last forever. But they warn, it will last for as long as the BoC wants it to last

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