Last spring, two economists with BMO released a paper asking policymakers to “act immediately” on the housing front.
“Canadian Housing Fire Needs a Response”, Robert Kavcic and Benjamin Reitzes titled the piece.
In it, Kavcic and Reitzes outlined a number of potential measures to cool down a “smoldering” real-estate market.
Policymakers should act immediately “before the market is left exposed to more severe consequences down the road”.
The possible measures mentioned in the March 30, 2021 paper include, among others, a speculation tax that would cover both principal and non-principal residences.
Kavcic appears to be referencing the same document in a new report Monday (January 17, 2022).
“Very early last year,” Kavcic wrote, “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.”
“And,” he continued, “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,” Kavcic stated, “it appears that 2021 was the year the market became unhinged.”
Kavcic released the paper on the same day that the Canadian Real Estate Association released annual sales figures for 2021.
The CREA reported that a total of 666,995 residential properties traded hands last year.
“This was a new record by a large margin, surpassing the previous annual record set in 2020 by a little more than 20%, and standing 30% above the average of the last 10 years,” CREA stated in a media release.
Meanwhile, the aggregrate benchmark price of a Canadian home went up by a “record 26.6% on a year-over-year basis in December”.
In another metric, the national average home price was $713,500 in December 2021, up 17.7 percent from the same month last year.
The 2021 market was so hot that sales from January to October 2021 already exceeded the 552,423 sales for all of 2020.
Kavcic believes that the market became unhinged in 2021 as “demand and investor appetite have taken over”.
“Expectations and investor appetite took over Canadian housing in 2021,” the BMO economist noted.
He continued, “We know it, and policymakers now know it too.”
To illustrate, 2021 sales that went 30 percent above the 10-year average highlighted the “boom in demand”.
Meanwhile, new listings “came to market exactly in-line with the 10-year average”.
“That distinction between demand strength and very normal resale supply flow couldn’t be more obvious here, and flies in contrast to the popular narrative that we are supply starved,” Kavcic wrote.
He added, “Of course, there are longer-term considerations on the supply side, but this is an acute situation.”
In the face of a tight market, prices surged.
Kavcic noted that 26.6 percent year-over-year increase in prices in December 2021 represented that the “fastest clip on record back to 2000”.
As for investors, Kavcic noted that data for Ontario “show that investors (multiple-property owners) accounted for the largest share of transaction volume in 2021, and were the biggest driver of the increase in volume from pre-COVID levels”.
Moreover, he cited recent findings by the Bank of Canada that “investor demand” as a whole in the country increased 100 percent year-over-year as of June 2021.
This level outpaced “increases among repeat and first-time buyers”.
The BMO economist also observed something about how many home buyers in general were able to make purchases.
“By August 2021, Canadians began taking on more in variable-rate mortgages than fixed-rate mortgages, which is a notable change in behaviour in a market that has traditionally been conservative users of fixed-rate product,” he wrote.
“Fixed mortgage rates backed up, and buyers had to shift to still-low variable rates in order to meet affordably and/or qualification criteria,” Kavcic stated.
He added, “That seems like a market that has been forced to stretch.”