Canadian Real Estate Will See Support From Policies, But Correction Risks Persist: BMO

Canadian real estate prices will get post-election support, but risks are piling up. Sal Guatieri, a senior economist at BMO Capital Markets, wrote to clients on the boom and risk of real estate. He sees policy enthusiasm and a lack of inventory boosting existing-home prices near-term. As prices continue to rise, he warns the risks of a correction continue to pile up.

Home Sales Are Tapering, But Prices Are Still Climbing

Canadian existing-home sales are falling, but providing little price growth relief. After peaking earlier this year, sales have continued to drop right into last month. Tempering demand is one factor needed to moderate price growth. It worked for a few months, until inventory vaporized.  

“Benchmark prices, which had been decelerating, sped up in August, as new listings are not keeping pace with robust demand,” he said, referring to national prices. “Prices have surged 21% in the past year, near the top of the global charts.”   

National numbers for September have yet to be released, but the trend has accelerated. Both Toronto and Vancouver reported tight inventory, and price acceleration last month. Smaller markets have also individually reported similar circumstances. Later this month, the numbers are likely to show September was an even bigger boom than August.

Federal Policies Will Provide Modest Market Support

“A smattering of demand and supply-lifting federal policies will provide some modest support to the market,” says Guatieri. The economist is referencing federal plans promising to lift both supply and demand. This might sound good on the surface, but it’s almost universally agreed this won’t do what they say it will. 

The plans were pitched as affordability measures, but boosting demand doesn’t do that. Economists warn these plans will only help a small demographic of buyers, and increase home prices. The demographic would largely see a boost to the amount they can spend, but wouldn’t save any money. It’s likely to support them paying even more and pushing prices even higher. 

That’s why the Fed is promising to solve the problem it’s going to create through supply. To offset the new demand, they also plan to expand programs to build more. It sounds like a great plan, but the parliamentary budget officer (PBO) already said it isn’t. The non-partisan office was unable to determine if it created any additional supply. From their study, it appears they took credit for supply that was already in the pipeline. At least developer margins improved, right?

Correction Risks Still Persist And Are Getting Worse

Despite the policy boost to housing, BMO still sees the risk of a correction persist. “… rapidly-eroding affordability across the country (though more in Central and Eastern Canada) will eventually cool demand and prices. Until then, correction risks will persist the longer that prices continue to leap-frog income.”

In other words, no problems are being fixed with the market by facilitating this price growth. It’s actually making it worse. The gap between incomes and home prices is made up by a stimulus-fueled credit expansion. As the economy improves, credit expansion is likely to lose stimulus and slow. When that happens, the gap between people who can buy and those who can’t, will further widen. This increases the risk of a correction from any future economic stumbles.

Like this post? Like us on Facebook for the next one in your feed.