Canada’s oldest bank is stepping up its efforts to claim that the housing shortage is a myth. BMO Capital Markets wrote to clients Thursday morning with another data point – completions versus household formations. The bank’s analysis argues that home completions have outpaced household formations for two decades. However, easy credit and successive waves of demand stimulation have led to excessive real estate speculation.
Canada has built more homes than new households for two decades
New data from the national statistics agency challenges the narrative of Canada’s housing shortage. “Canadian census data on private dwellings occupied by usual residents suggests that household formations have consistently lagged the supply of new dwellings for most of the two decades, which even explains an underestimate likely formations,” said Sal Guatieri, senior economist at BMO.
BMO estimates that up to 92,000 ‘surplus’ homes have been built in the last 5 years
His calculations show that household formations average just over 181,000 in the five years to 2021. By contrast, last year the market saw nearly 223,000 newly completed homes, while house prices continued to accelerate. Over the past 5 years, he estimates a surplus of 92,000 homes – dwarfing demolitions, less than half that number on the high estimate.
Cheap credit and speculative dreams have led to excess demand
Ask any Canadian and they’ll tell you the best investment is real estate. After 30 years, most people assume that means house prices will continue to outpace any productive investment forever. Unfortunately, this may not be the case.
Last year, the Deputy Governor of the Bank of Canada (BoC) explained that low rates had helped push up house prices. Traditional monetary policy believes that lower rates save homebuyers money on interest. In reality, the deputy explained that people are simply borrowing more to pay for the exact same thing.
It was only last year that the BOC looked into the role of psychology in credit application. They found that 30 years of falling interest rates had helped inflate house prices and shift money from the productive economy into unproductive speculation of financialized assets.
“The country does not have a supply problem so much as an accessibility problem due to recurring waves of excessive demand pressure,” says Guatieri.
To paraphrase a popular statement from the last time Canada thought it was underbuilt and turned out to be wrong — it’s the money, stupid.