February 18, 2022, by Ian McGugan
Canadian home prices have been climbing for two decades, but the past two years have broken all records. The problem comes when the tsunami of demand unleashed by rapid population growth and low rates smashes into a supply of homes that isn’t growing nearly as quickly as it should.
“Policymakers should have thought about these issues 10 years ago,” argues says John Pasalis, a real estate researcher and owner of Realosophy Realty Inc., a Toronto real estate brokerage, “They should have thought about how they would meet the housing demands of a rapidly increasing population. Instead, they did the opposite. They accelerated population growth without any thought about how to address the housing issues that would be created.”
This isn’t to deny that Canadian home prices shot up enthusiastically between 2000 and 2015. But much of the Canadian market’s gains between 2000 and 2015 can be chalked up to three simple factors: inflation, rising real wages and falling interest rates.
In the short and medium turn, though, other factors will play a role in shaping Canada’s housing market. The most important force to watch is interest rates. The near-zero rates that have helped fuel the massive run-up in Canadian home prices over the past two years are finally on the verge of turning higher. If the Bank of Canada tightens policy as expected, today’s red-hot real estate prices could soon face the cooling impact of higher borrowing costs.
That brings us to the other undeniable fact of Canada’s current housing market: its unaffordability. Mr. Pasalis, the Toronto real estate broker, points out that only about 10% of low-rise homes in Toronto now sell for under $1-million. “Most people simply can’t afford it,” he says.
A good place to start thinking about what comes next is to focus on what Mr. Perrault at Scotiabank calls the single most important fact about the Canadian housing market – the huge imbalance between supply and demand. “None of this is rocket science,” he says. “We simply have not been building enough homes.” It is difficult to argue with his logic.
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