Home prices across most of Canada – particularly in high-demand urban centres like Toronto and Vancouver – are continuing to climb. This is happening even though the federal government introduced legislation in October designed to cool the market.
So why does it seem that prices have gone completely the other way? Simply put, prices had to climb.
In a nutshell, here’s why. One of the first rules of economics is the law of supply and demand. In general terms, the price of an object is directly related to the number of items available for sale compared to the number of interested (qualified) buyers. When there are more items for sale than there are people to buy them, the price tends to go down. If there are fewer items for sale and more buyers, on the other hand, the price tends to go up.
Given this rationale, there are three likely reasons why our housing market has continued to appreciate at such a rapid pace:
- There are too many buyers
- There aren’t enough houses
- A combination of the two
The government believes the driving force behind the consistent rise in home prices is too many people wanting to buy. They have put radical rules in place trying to restrict the numbers of buyers and, to a large degree, have been successful.
So, why haven’t prices gone down? The reason is that the issue was never a problem with the buyers. There hasn’t been enough of a population spike to create the price increase and foreign investors are estimated to make up less than 2% of the total market – not nearly enough buying power to account for the type of price pressure we’re experiencing.
So, logically, if the problem isn’t buyers, the problem must be caused by of a lack of inventory. If this is the case, the next question is: Why is there a shortage? Did the number of houses decrease? Obviously not.
Here is what happened. Beginning in 2008, the government made several changes in legislation that have made it progressively more difficult to qualify for a mortgage. Arguably the most restrictive changes were the latest ones that came into force in October 2016.
The theory is that reduced buyers equals reduced prices. The problem is, however, that legislators did not anticipate that if people could no longer afford to buy a new house, or even re-qualify for the one they have, they will stay put. The reason they can’t re-qualify is simple. The amortizations are shorter which drives up monthly payment and the new qualification rule has meant that on 5 year money you would need to have an approximately 40 % increase in gross income to accommodate to match up to the 5 year posted. In other words, there is now a large volume of cyclical resale homes that are no longer available. People are stuck in their homes and can’t sell. In practical terms, the reduction in homes was far greater than the reduction in first-time homebuyers. So now we have a legislated housing shortage.
As we know, when there is a lack of supply, prices will rise. The stricter the legislation, the fewer people who can qualify to purchase and the less likely they are to sell. It becomes a vicious circle.
What’s the solution?
If the legislation has been one of the largest controllable reasons there’s an inventory shortage, then gradual scaling back of the legislation will put inventory back on the market and lead to a market-driven easing of prices.
The only question that remains is: Will the government take action to fix a problem they’re largely responsible for or will they continue to repeatedly make the same mistakes?
Only time will tell.
Last modified: May 24, 2022
Ridiculous thesis. For every buyer there is a seller. Demand from the buying side has outpaced supply at any level because prices continue to rise and many people now believe this will continue in perpetuity. Increasing the supply of new housing will do nothing to resolve, but a change in sentiment WILL increase the supply of existing homes as sellers try to time the market.
Your analysis doesn’t account for investors who own multiple properties, a rising trend, nor the fact that new condo developments have been rising relative to historical norms. In a hot market, inventory will always appear low, and in a weak market high.
It is easy to see why anyone in the real estate transaction business wants increased supply, or otherwise put less environmental protection or easier restrictions on development of any type. Unfortunately for them, and fortunately for the rest, those that impose these rules consider a period longer than that required to obtain a commission.
I would agree with you except in all affected markets the stats would show differently. At some point people will take profit and there will be an increase in inventory and prices will ease. But it’s a fact that when ever there has been a shortage in resale homes.
Totally disagree. There are enough homes – both houses and condos. Prices are going up because money is too cheap — meaning interest rates are TOO low. Price gains have been averaging 10% a year for the last decade and since 2000 the best thing you could do with your money in Canada is buy real estate. The abuse of the personal home exemption on capital gains has made it even more profitable. Then add in the fact that getting the biggest mortgage and house you can carry has been the best leveraged investment strategy you could have done. Now a whole generation of home owners have never seen prices go down except for a 6 month period in 2009. People are house crazy and house rich (on paper) — those 2 things together have created a mentality that is propelling the market. ONLY seriously higher interest rates will change what people can afford and bring some form of normalacy to the housing market. In the GTA, even a 50% correction by this time next year (May 2018) would bring us back to spring 2015 prices – and that is not a good thing in the long run for Canadians. One’s primary residence should not be most important investment and form of savings for 75% of Canadians – but unfortunately it is and that is why pricing has gone crazy.
The cost of money is definitely a factor. However if it were the only factor then how do you count for the spikes in price that is not reflected with a corresponding uptake in volume. In addition the rates have been marginally flat for years.
The whole concept of the article and the premise behind it is that legislation has been used in lieu of interest rates to curb the market which as you point out is absolutely the wrong idea. Using the interest rates to control the housing market was and is the smart move in a normal housing market allowing for a level of fine tuning that legislation could never accomplish. Unfortunately the government for a number of reasons is unwilling to use interest rates in the way they were intended.
There will be a balancing of the market at some point, where people start to take profit and sell. But it is still an issue of inventory that has been identified as the issue.
“how do you count for the spikes in price that is not reflected with a corresponding uptake in volume. In addition the rates have been marginally flat for years.”
– It is incorrect to say that rates have been “marginally flat”. Every year there have been cheaper rates to be had even though the BOC rate may have been relatively flat. Discounts on variable rates have increased every year since the financial crisis which has made money cheaper and cheaper. In addition, people have been renegotiating or renewing their mortgages every year and they are moving to much cheaper rates which as a result act as rate cuts for these people. Add in money from foreign sources (not technically foreign buyers) like parents of Canadian immigrants who live/work here. This influx of cash is further helping to distort the value of homes because of 17 year run of price increases and belief that they will never correct (like Hong Kong, NYC, London etc. — you have heard it many times before. Don’t forget that the high immigration and great employment environment and you have people that are more than willing to borrow as much money they can get just to purchase a home.
“The whole concept of the article and the premise behind it is that legislation has been used in lieu of interest rates to curb the market ”
– I didn’t see anywhere in the article that you advocate “higher interest rates” and the old Editor of this site insisted that it was never good for consumers to pay higher interest rates. So, excuse me if I am a bit confused. You indicate that the “government legislation” should be pulled back but you don’t say anything about “AND raising interest rates”. Furthermore, it is not the government’s job to raise interest rates since the BOC is responsible for that and they are an independent body so it might constitute political interference if they were to force the BOC to do so. In fact, enacting government legislation was the only tool at their disposal which is why they did it. If anything then you should be targeting this article directly at the BOC and not the government or other regulating bodies that don’t have the ability to do the one thing that fixes the mess – raise interest rates. Lastly, I find it a bit amusing that since the financial crisis the mortgage broker industry has almost uniformly objected to every regulation and piece of legislation because they argued it would crash as a result (the sky was falling when BC enacted a small foreign buyer tax)… but you are arguing that all the government intervention has actually fueled the fire. Both cannot be true and probably both are false since there probably wasn’t ENOUGH government intervention/regulation/legislation to slow the market 5 years ago and prevent what has now happened.
Your correct. I don’t discuss interest rates in my article. I do however know that historically speaking, the BOC has always used interest monetary policy to control the market.
I don’t speak for the industry. However I think there is more concern that legislation will shrink the market That is substantially different then wanting to cool pricing. I don’t know anyone that is advocating price increases.
As for your other points, I simply don’t agree with your synopsis. But I fully respect your entitled to your opinion.
All the best.
Does the fact that central banks around the world are printing $250 Billion a month of fiat currency have anything to do with this?
Respectfully the concept that more liberal lending policies would result in lower house prices makes zero sense.
Hey Ron.
We have had this conversation. I understand your point but still disagree. All the best.
There has recently been a large spike in listings on the Toronto Real Estate Board. I’m not sure the theory presented as to why people can’t or won’t list their house for sale, thus restricting inventory, holds much water.
The increase in listings may well have indicated that the market just peaked. Hopefully!
You are absolutely correct. There will always be a tipping point. Not sure if it’s now or not. The same thing happened in October last year,. However as identified by MPC’s economist it is not universal and is market by market currently.
It is similar to what happened in Vancouver recently as well. Vancouver’s market has stabilized and is already rebounding.
But your point actually speaks to what we are saying here. For specific reasons inventory has been restricted and the issue was not demand. Therefore legislation to that end was futile.
Thank you for the obsevation.
A spike in listings???? Surely you jest. Only a major move in interest rates (minimum of 1.5%) will start to correct the balance. Listings always spike in April and May is almost always the best month to sell your house (in terms of avg price during a year – historically speaking). I wish you were right but it is not so.
If a person sells their home, they need to buy another one. For each sale, you are adding one more buyer to the market (armed with a nice fat down payment). The increase in inventory would therefore be matched in lockstep by an increase in buying and price pressure, at exactly a one-to-one ratio. The net effect on supply and demand is therefore zero. Thus, the lack of motivated sellers can’t possibly be the reason for the price increases. This argument fails the logic test.
You are right about people needing to repurchase. This has meant , however, people are being forced to peripheral markets like Hamilton to compensate for their inability to re buy in the market they are selling.
This accounts for the huge and well documented spikes in prices in the surrounding markets.
I appreciate to comments. In most cases I agree with the observations. However in reality the points all largely support the conclusion here.
Inventory has ben restricted, people who can’t afford to move with in their natural markets are moving farther a field to be able to buy back in which has lead to huge and un precedented growth in the markets with in commuting distance to the GTA and GVA.
Interest rates and not legislation was the appropriate way to handle the real estate market and cool things off.
While there will always be a balance it is obvious that the legislation has not accomplished the desired effect. Alistair, the logic test your talking about only works if the market is restricted by a border.
I miss Rob McLister already.
Banker – Truer words were seldom spoken
I like your take on the issue James, it makes sense to me.
If more people could buy, then more people would buy and conversely sell, more properties for sale less competition for each property, leading to more “normal” valuations.
Just my humble opinion and we all know that like a certain bodypart, everyone has an opinion.
And there are a lot of opinions on here. Such is the blog space.
Thanks for writing James.