Canadian Housing Update 1: June 12th, 2023

Interest Rates and Canadian Housing Update

Contents:
1.  Canada hikes another 25 bps!
2.  Thoughts: Comparison to the 1980s and 1990s
3.  Housing Affordability vs. Housing Prices
4.  Housing Demand vs. a Growing Population
5.  There is not enough housing
6.  The Government does not want higher prices, and this is like 1980/1990

Canada hikes another 25 bps!

It seems Canada has set its sights squarely on the real estate market. After two meetings of rate pause Canadians jumped all over the real estate market pushing up prices again in May after a rebound in April. Below are the stats for the GTA, but they are all similar for Vancouver, Calgary, and Montreal.

The central bank has proven it will continue to try and suppress housing price increases with higher rates and potentially tighter regulation. All this is despite many data points that suggest a very stretched consumer.

Canada cannot afford housing to increase, not because Canadians are being priced out of the market but rather because the higher prices rally the more likely the chance of it crashing uncontrollably which would be detrimental to our economy. Real estate is tied to many of our jobs and a large percentage of our net worth. We can expect that quick increases in prices will be met with either rate increases or potential regulation changes.

Thoughts: Canada does not want real estate prices to rise and the current scenario is very similar to the 1980s and 1990s when real estate prices took a break.

1980 and 1990 Inflation Fights

Both times were selected because during both periods the Bank of Canada tried to combat rising inflation by raising interest rates. The below chart is a historic inflation chart:

Below is the overnight rate set by the bank of Canada to combat those inflation rates:

In both periods there was a rise in inflation (also a rise in housing prices, shown below) and a subsequent rise in rates to combat inflation. Following winning the battle with inflation rates came down but housing prices did take a break for an extended period of time after being elevated.

Housing Affordability vs. Housing Prices

As every Canadian knows housing is unaffordable for the average person. Believe it or not, this is not the first time in history housing has been unaffordable. But there is a very prominent correlation between housing affordability and housing prices.

This is a similar trend to 1980 and 1990, in which housing became very unaffordable. As you can see in 2008, while there was a financial crisis in the world, our real estate was relatively unaffected. This was mostly not because Canadians are better, but rather because our housing was not unaffordable and the decline in income had less of an effect on housing.

Our current affordability is similar to 1980 and 1990, in both times there was an inflation problem and in both times housing was unaffordable. Housing drove up in price (very common with high inflation), and the federal government tried to bring down inflation with higher rates. In both periods there was a lengthy period of calm real estate prices should below:

Housing Demand vs. a growing Population?

We are most likely entering into a similar period to those inflation fighting periods. In both those times, development also slowed which brought down supply, but demand also fell pretty quickly.

In 1990, Canada was seeing 250,000 new immigrants a year which is approximately 1% of the population. Today it’s about 450,000 or about 1.2-1.3% of the population. Overall population growth is slowing due to a large drop-in birth rate compared to the 80s and 90s. While there is more immigrant’s population growth used to be higher. In the 80s and 90s we were growing by about 300,000 new humans per year. Now that number is closer to 400,000. The population is growing but no faster than it has in the past.

There is not enough housing

Currently, we are not producing enough houses for our growing population. Therefore, housing prices should go up. Below is a chart of housing completions vs. population growth. The ratio is the number of houses completed for every new person. A 1.0 ratio would be 1 house for every 1 person.

Housing completions have been a declining trend along with population growth for the past 50 years and yet there were real estate recessions in the 80s and 90s despite less housing completions vs. population growth. Lower supply vs. higher demand should point to higher prices but this actually has not been the case over the past 50 years. We have always underproduced, but this trend cannot go on like this forever. Canada will need to address this issue sooner rather than later.

Conclusion: The government does not want house prices to increase and the parallels of the 80s and 90s are prominent.

We are still down about 7% from the housing peak of 2022 and the government seems to have both eyes on real estate prices. This scenario is very similar to the 80s and 90s when the government was also fighting inflation. Inflation is turning downwards, and unemployment is creeping up. Therefore, there was no real reason to raise rates unless it is to keep real estate in check. Which they did mention real estate prices specifically in their press conference after the rate increase. Due to the significance of real estate to our economy they also cannot let it fall
too far. They are aware they can lower rates and lower regulations to spur real estate prices if needed. It is likely they will try and balance prices until affordability and supply can catch up.

Justin, Konrad, and Merriel

More articles and information are available at www.lkwealth.ca

Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research

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