BMO Capital Markets Finds Canada’s Housing Supply in Line with Historical Norms

BMO Capital Markets recently conducted an analysis of Canada’s housing market and found that there is currently no significant lack of supply. However, the report highlights a concern with the country’s exuberance for rapid population expansion, which could lead to a shortage of supply in the future.

The analysis compared the number of new housings starts to the growth of the working-age population, showing little deviation from historical norms. Over the past 45 years, the ratio was 0.6, or 1 new home per 1.7 adults, which is about 32% more housing than the average household size requires.

Although there has been some tightening recently, with the ratio dipping below 0.5 points during some periods, new home starts remain elevated compared to historical norms. The bank notes that the ratio has even climbed above the long-run norm recently, indicating that there is no significant deviation from historic standards.

The report argues that the issue is not a lack of supply, but rather an excess of demand. Cheap credit has fueled investor speculation, outbid end-users and driving up prices. Rapidly rising home prices also lead to less inventory, as it provides incentive to hold surpluses. Additionally, Canada’s pursuit of rapid population expansion during a housing crisis may create a supply shortage if it persists.

While Canada’s largest price growth was during the pandemic’s population stagnation, it was exuberant expectations of stimulated demand that drove the growth. The report warns that if Canada continues to pursue perpetual growth at this clip, it is unrealistic and could lead to a shortage of supply when the population grows by one million in a single year.

The report concludes that the wildness seen in the housing market during the pandemic was fundamentally a demand surge, and not some new supply issue. Although speculative narratives may not make sense or persist, they only need to demonstrate some short-term reinforcement, providing enough doubt that it’s possible.

In summary, BMO Capital Markets’ analysis shows that Canada’s housing supply is not a concern at the moment. However, the country’s exuberance for rapid population expansion on top of its already strong demand could lead to a shortage of supply if it persists.

Source: https://betterdwelling.com/canada-didnt-have-a-real-estate-supply-shortage-but-its-gov-may-create-one-bmo/