Canadian home prices soared by nearly 25 percent in May, gains driven primarily by blazing single-family home markets across the country where buyers are fiercely competing for a limited supply of houses for sale.
This mismatch between buyer demand for detached homes and supply available on the market is an “entirely predictable outcome” resulting from decades of land development policy and demographic changes within Canada, BMO Senior Economist Robert Kavcic wrote in recent commentary published to the bank’s website.
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While Kavcic is careful not to pick sides, he isn’t surprised by the backlash generated by Core Development Group’s recently announced move to purchase $1 billion of Canadian single-detached homes to rent out over the years ahead.
There have been consistent calls to expand rental stock across the country for years, but even as the move achieves this goal, it won’t actually add any brand new supply to the market. Instead, Kavcic noted, it “bids up the price for an already extremely scarce resource (detached homes) in the major cities and, more recently, smaller mid-sized cities.”
“At an emotional level, it is a young family versus big corporate money,” he wrote.
But Kavcic traces the root of this controversy back to the deliberate policy move undertaken by provincial governments across the country — notably Ontario’s 2005 Places to Grow Act — that sought to encourage denser forms of housing like condos. The result is that over the last 15 years, multi-family home construction has significantly outpaced single-family homes.
Just as multi-family home construction was skyrocketing, Kavcic wrote that Millennials were aging into their prime homebuying and family-starting years.
“The thing is, the idea that families want to live in dense, smaller and walkable urban spaces, is a bit of a fairy tale,” Kavcic wrote.
“Young families want space, and they need it at a time before the baby boomers are ready to move on from those coveted properties, and after 15 years of crowding out single-detached development,” he wrote.
So while the pandemic has certainly heavily influenced the market dynamics, the current major supply and demand misalignment was predictable based on these long-standing policy decisions and the large cohort of 25 to 39-year-olds looking for bigger homes.
“This imbalance should be cresting in the next few years, but the pandemic (pulling forward some activity), immigration targets north of 400k people per year, and record-low interest rates have magnified it,” Kavcic wrote.