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price increase

The Numbers Are In! Record Price Increases Continue

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:

  1. There are too many buyers
  2. There aren’t enough houses
  3. 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.