Canada's real estate bubble under-supply myth unravels: BMO

Canada’s real estate bubble under-supply myth unravels: BMO

Canadian real estate is suddenly in short supply after historically low rates. Not in big, prosperous cities, but in small towns and rural communities. Canada experienced the largest boom, but it has appeared in almost every advanced economy. Right after the price was cut to stimulate demand, there was a sudden shortage all around. BMO Capital. Economists claimed it was a credit-fueled bubble. Rising interest rates now show that the narrative of insufficient supply is collapsing.

Canadian real estate was buoyed by a speculative bubble, not a lack of supply

BMO notably challenged the Canadian narrative of lack of supply. With the exception of SFU professor Andy Yan, few scholars have questioned the program’s storytelling. It made sense – interest rates were lowered and there weren’t more homes left. Obviously, lower rates designed to stimulate demand to help inflation played no role. Clear as mud to most economists.

It is true that there has been a shortage of real estate for sale in Canada … in the United States, Australia, the Netherlands and in almost all advanced economies. This is an expected result and a natural reaction to lower tariffs.

Low interest rates help expand budgets, but more importantly, they stimulate demand. This stimulus to demand aims to outpace supply and raise home prices. When prices go up, it attracts more people to buy. Nobody wants to pay more for something, which is the same principle that fuels deflation fears. Lower prices mean that people are waiting to see how far they will go up, while higher prices lead to a fear of fear. This is a well-known feature of hyperinflation.

At the same time, no one wants to sell their assets at higher prices because this is their golden ticket. Nobody wants to sell a device that makes thousands of dollars a month. In fact, the current owners of these assets are trying to capitalize on buying more. This is prominently seen with the influx of cash flow from passive investors. Canada recorded more than a quarter of recent investor purchases.

Everyone has seen an opportunity in their life to make a fortune no matter where. Canada, the second largest country in the world and one of the most densely populated countries, is running out of land. Not in Vancouver or Montreal, but in small towns and the countryside, often in the middle of nowhere.

BMO wasn’t buying it. “For most of the past year, we have played relentlessly in Ontario’s small and medium property markets,” said Douglas Porter, the bank’s chief economist.

Small, low-income rural real estate markets trade like cities with high GDP

To illustrate his point, he uses Chatham Estates. Beautiful but unremarkable city about 3 hours from Toronto. Writing it on Google asks the second most common question: “Is Chatham a disadvantaged region?” It’s kind of become a boomtown, with incoming investors and buyers driving up prices at a faster rate than Toronto.

“A chosen example is Chatham, where after decades of nearly zero growth, prices suddenly jumped nearly 90% in the first two years of the pandemic,” Porter said.

Adding: “The race has pushed home prices in cities like this above Edmonton (which just doubled Chatham prices four years ago) and almost to Calgary levels.”

Chatham is trading at prices close to Calgary. Small rural real estate market mostly for the same price as a global energy center. With half the median household income in Calgary, to boot.

No, housing did not suddenly run out in all markets after the price drop

BMO explained that the price hike was due to a lack of supply, and no one would hear otherwise. “A certain part of the analysts — almost everyone except us — assured us that all of this was due to a lack of supply, while massive investment demand amid very low rates had nothing to do with the sudden rise in prices,” Porter said. . .

“It is curious that cities like Windsor, Welland, Woodstock and Waterloo are all simultaneously experiencing severe shortages, after decades of no such discussions in this region.”

Supply shortfalls have occurred in almost all advanced economies at very low rates. BMO argued last year that the land of unexpected megacities around the world ran out at the same time. Nor is it likely that the city’s administration failed all at the same time. This was most likely due to increased demand resulting from ease of credit.

The Bank for International Settlements, the arm of the global central bank, has released research arguing that central banks are inflating house prices. They released a study that attributed the rise in global home prices to monetary policy. They said cheap credit is the main driver, not a lack of supply. Monetary policy mistakes have been made all over the world because they are blessed with easy growth.

The Bank for International Settlements advised central banks to raise interest rates and cut credit to reverse the chaos. They warn that failure to do so could lead to a financial crisis. It should be noted that the President of the Central Bank of Canada was recently appointed as Governor General of the Bank for International Settlements.

Phew! High interest rates solve the real estate supply crisis

To be sure, rising interest rates suddenly resolved the supply crisis. Not many people realize that the app needs qualification or that it doesn’t exist. Everyone wants a diamond the size of their head, but are they willing to pay millions for it? Probably not, so perhaps doing more to fight inflation is not the limiting factor. Honestly, it doesn’t matter if there are a billion investors waiting to buy homes. They don’t buy it at these prices, so the demand isn’t really there.

When prices rose and prices began to fall, the eligible demand to buy at these prices fell off a cliff. Say goodbye to investors looking to buy negative cash flow real estate and count on appreciation. Hello new inventory.

“Well, before the change, the first moderate price increases caused prices in these hot cities to drop suddenly without any specific change in the underlying supply,” he said.

“Chatham, for example, saw a 20% drop in prices in the four months to June — one of the biggest declines in the country; and remember, that’s before the start of the massive 100 basis point rally last week. Do you think that’s really all there is to it? Was unbridled speculation the real problem?
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