Canada delivered its biggest affordability measure in years—shrinking its population. That was the takeaway from a new report from BMO Capital Markets this week. The bank has repeatedly warned that promises to triple the new homes built and create affordability with supply, weren’t grounded in reality. Now that Canada is quietly acknowledging this failure, they see real affordability on the way as scaled up building meets a shrinking population.
Canadian Real Estate Prices To Correct With Immigration Changes
Canada is pulling back on immigration after a disasterous attempt to use it as stimulus. Building on top of this year’s reduction to temporary residents such as foreign students, the country will see state-mandated de-growth. For the next two years, the population will shrink in a attempt to stabilize housing after policymakers’ promises to triple homebuilding fail to materialize.
“You’ve heard us for years pushing back against the narrative that Canada needs to triple the rate of housing construction. That was partly because it’s just not possible; and, mostly because the demand curve is what was really running amok,” explains Robert Kavcic, senior economist at BMO.
Source: BMO.
Kavcic has long maintained there was no supply problem until recently. That problem was manufactured by policymakers in an attempt to boost home prices. A problem they periodically remind us of, despite flip-flopping on affordability.
“Changes to Canada’s immigration targets announced Thursday are the second prong of that demand curve (BoC rate hikes were the first, which cleaned out speculative froth). An implied slowdown in population growth from above 3%, or more than 1.2 million people, to around zero, is going to have a very real and very quick impact on housing costs, especially rent,” he explains.
Canadian Real Estate Was A Demand Issue, Not A Supply One
Policymakers are now acknowledging it wasn’t a supply side issue. They originally attributed the rise in home prices to regulatory hurdles. Lifting those measures boosted land values, actually reducing the amount of building. To mitigate this, taxpayers pumped hundreds of billions into state-backed loans and stimulus to incentivize developers, to no effect.
“While well intended, the host of supply-side measures (e.g., building multiplexes in detached neighbourhoods) will look trivial when stacked up against moves in the demand curve,” explained Kavcic.
Adding, “The takeaway is that policymakers have seen the light, and we’re on our way back to normalizing the housing market and affordability situation. It’s just going to take time given how far out of line we got.”
English (US) · 