Canada’s housing market has been taken over by investors, BMO Economics senior economist Robert Kavcic warns in a note released in the wake of new data that shows that fewer houses are on the market than at any other time in Canadian history.
“Very early last year, BMO Economics warned that policy (starting on the monetary side) needed to tighten in order to prevent the market from becoming dislodged from underlying fundamentals,” he wrote.
“And, that came from a team that spent many, many, years defending the Canadian housing market from wave after wave of bearish assault, as most of the gains were rooted in income, demographic and interest rate fundamentals. Now, it appears that 2021 was the year the market became unhinged.”
He said it’s become clear that investors are driving demand – offering some key data points.
- Sales were 30 per cent higher than the 10-year average, marking high demand. But new listings were the same as the 10-year average. He says that “flies in contrast” with the idea that there aren’t enough houses on the market.
- After staying steady for a decade, expectations of price house growth is trending higher according to a weekly poll conducted by Nanos/Bloomberg.
- The Bank of Canada published findings last week, based on loan-level data. The data show that, as of June 2021, investor demand is up just shy of 100% y/y, well outpacing increases among repeat and first-time buyers.
- By August 2021, Canadians began taking on more in variable-rate mortgages as opposed to the long favoured and more risk averse fixed. “The reason? Fixed mortgage rates backed up, and buyers had to shift to still-low variable rates in order to meet affordably and/or qualification criteria. That seems like a market that has been forced to stretch.”
His bottom line?
“Expectations and investor appetite took over Canadian housing in 2021. We know it, and policymakers now know it too. Look for 100 bps of tightening by the Bank of Canada this year to help clean out some of the froth.”
