Real estate prices in Canada won’t correct themselves due to population growth, will they? Well, BMO Capital Markets shared a different vision with the institutions this morning. The bank explains that there is no historical evidence to support this account. During the last major drop in house prices, Canada saw its population grow at a faster rate. They warn that interest rates have a much greater influence on house prices than population.
Housing demand has fallen despite the population boom
Despite a booming population, the latest figures from Toronto and Vancouver show declining sales. Both cities are reporting a few weeks ahead of national data, but the same trend is expected. Higher interest rates have killed demand for mortgages, but it’s too early to have that impact. Higher rates broke the speculative mindset, a problem BMO has maintained will be, for months.
Before opening the emails to explain that things are always busy, relax. BMO says the drop in sales looks bigger than it is, due to a base effect. Volumes are still high, but don’t dismiss the decline entirely.
“Still, the declines are notable, with sales in Toronto down more than 40% y/y, and this is just the first few days of higher rates,” said Douglas Porter, the bank’s chief economist. .
Canadian population growth has no correlation with house prices
Just a blip, right? A billion immigrants are coming, creating a price floor that will keep prices from falling. Let’s ignore the fact that a fifth of recent immigrants want to leave because of the cost of living. We will also gloss over the fact that studies show that Canada seems less competitive day by day. Heck, let’s even silence the poor value proposition for immigrants today. Let’s just focus on the latest BMO chart showing no correlation between population and house prices.
“Homebuyers are confident that rising immigration and strong population growth will keep the market floor firm,” he said. Adding “Maybe. But the attached chart shows zero correlation between population growth and house prices.
Rates outweigh population growth when it comes to home prices
In the chart above we can see little correlation – prices are even rising ahead of demand in some cases. However, the problem that stands out the most is the fall in prices in the early 1990s. Regardless of whether population growth was stronger than today, house prices fell. At the time, Canadians also believed that there was no more land, as is often the case during a bubble.
“One would suppose that the old [population growth] would lead the latter [home prices rising], at least a little,” Porter said. “Yet note the example of the early 1990s, one of the most difficult times in recent memory for the Canadian housing market (and certainly the Toronto market).”
“Over the past four decades, the three years from 1988 to 1990 saw the strongest population growth – and that didn’t prevent an outright slump in house prices at the end of the period in the middle of a sharp increase in borrowing costs. Just a word of warning.”
Demand drives up house prices, but demand is more important than just the number of people. Liquidity, which depends on leverage and the availability of credit, ultimately determines prices. It doesn’t matter if home prices were $1 million last week, if the next qualified buyer only has $800,000. Seller accepts less or retains ownership.
It’s not just a problem that BMO insists on. The Bank of Canada (BoC) has previously explained that low rates have not improved housing affordability over the past 30 years. People just adjust their budget and pay more for the same thing. Well, 30 years in the wrong direction can’t be that bad, can it?