It’s simple economics – an increase in demand for any commodity results in higher prices. Competing buyers outbid others, sometimes dealing a severe blow to low-income families. But in a competitive market, a rise in demand is often followed by new suppliers entering the market, compelling prices to cool off.
Canada’s housing market – more than anything else – is being shaped by this basic rule of economics. In a world struck hard by the pandemic, housing sector activity is defying all economic trends on the annual parameters. Most analysts and government agencies are pinning the blame for the frenzy on factors like record-low policy interest rates, which made mortgages cheaper. Neither has the Bank of Canada indicated any imminent rise in rates and nor does it have the elbow room to suck liquidity at a time when the economy has contracted in the second quarter.
In its latest report on the housing market, the Royal Bank of Canada cited “tight supply” as the primary reason behind a dip in housing activity. In August, housing inventories in Toronto were down 51 per cent compared with August 2020. This is a sizeable difference. Supply-side constraints are playing out similarly in other cities, including Vancouver and Montreal.
It is important to note that the same tight supply was the reason for skyrocketing house prices during the pandemic. But then, the buyers were in high spirits as the economic impact of the pandemic had yet to manifest itself fully. The federal government’s stimulus was in place to flood Canadians’ bank accounts with cash. Mortgages turned cheaper when policy rates were brought down to 0.25 per cent.
In March, the average house price was at an all-time high of $716,000. Again, this price was a product of low supply. But the following months were marked by a drop in prices as well as sales volume. The RBC report says the dampened activity is a direct consequence of low inventory, besides buyers’ fatigue. The latter cannot be quantified, and the former can easily be.
The decline in sales volume has yet to translate into the moderation of prices. In August, the average price was $660,000, up from $580,000 in the corresponding month last year. The market undeniably has a lesser number of bidders, but those buying are paying high prices that may not be consistent with fundamentals like labour wages, interest rates and population growth. Subdued sales volume is because of a lesser number of listings. And hence, it can be deduced that supply-side constraint that resulted in an over-heated market is now fueling stagnation.
Another report by the Real Estate Board of Greater Vancouver suggests that active listings in Vancouver have dipped to a level not seen since 2016. Low active listings, the report says, was a trend all during the summer months of 2021.
The housing sector’s unaffordability was a significant issue in the run-up to the election. That foreign buyers will be banned from the market for a couple of years was a promise made by both major parties. The Liberals even suggested a ban on blind bidding to make homes more affordable. But unless the government makes it a point to address supply-side constraints, any other measure may not have much impact.
In the U.S., another housing market turned hot by the pandemic, the Fed has come out with some interesting findings on demand and supply forces. In July, it published a report about whether it was increased demand or reduced supply that fueled prices in the housing market. It concluded that a surge in demand was primarily responsible for the tightening of the market, and any improvement is unlikely in the short term even if supply constraints are addressed. Although this report pinned the blame for the frenzy on buyers’ demand, this demand would never have turned the market hot had there been an adequate inventory of houses to meet it.
A recent note by the White House accepts that the “housing supply has not kept pace with population growth” over the past four decades. It states that construction of entry-level homes has “decreased sharply” and says that one in four renters spends more than half of their income on rent. The note finally accepts that supply-side problems are “only worsening”.
The Canadian government has been aiming to increase the housing supply through the multi-billion-dollar National Housing Strategy and the Rapid Housing Initiative. It also has embarked on strategies such as a tax on vacant properties owned by non-residents and the First-Time Buyer Incentive taken by the federal government to make “housing more affordable”. But the 51-per-cent decline in listings in Toronto in August, however, indicates how measures may be falling short of achieving the goal.
To improve accessibility and affordability, the government needs to do more than just banning blind bidding or foreign buyers. Administrative and legislative actions will be the key to building more houses in a country where at least 30 per cent of families have yet to own their homes.
Kunal Sawhney is the founder and CEO of Kalkine. An accomplished financial professional, he has extensive expertise in equity markets and adopts quantitative and qualitative stock selection practices.
