After nearly a year of home price declines in Canada, the optimistic case for the market to stabilize in 2023 rests on the belief that a combination of population growth and limited housing supply will keep prices well above their prepandemic levels. Stephen Brown, an economist at Capital Economics, says don’t bet on it.
In a report this week, Mr. Brown took aim at the idea a lack of supply was the main driver of soaring home prices during the pandemic. Yes, he acknowledges, Canada trailed countries like Australia, the United States and England in home construction over the past 20 years when population growth is taken into account, but international home price changes bear little relation to homebuilding, he says.
Indeed, over the past two decades the three periods that saw the sharpest price surges in Canada (2002 to 2007, 2016 to 2018 and during the pandemic) were preceded by the largest increases in the number of housing units per capita.
Housing units per capita and house prices
Left scale: Annual percentage change in housing units per capita
Right scale: Annual percentage change in house prices
30%
0.8%
0.6
20
0.4
0.2
10
0.0
0
-0.2
-0.4
-10
-0.6
‘93
‘98
‘03
‘08
‘13
‘18
‘22
THE GLOBE AND MAIL, SOURCE: CAPITAL ECONOMICS
CALCULATIONS BASED ON DATA FROM REFINITIV
AND OECD
Housing units per capita and house prices
Left scale: Annual percentage change in housing units per capita
Right scale: Annual percentage change in house prices
30%
0.8%
0.6
20
0.4
0.2
10
0.0
0
-0.2
-0.4
-10
-0.6
‘93
‘98
‘03
‘08
‘13
‘18
‘22
THE GLOBE AND MAIL, SOURCE: CAPITAL ECONOMICS
CALCULATIONS BASED ON DATA FROM REFINITIV AND OECD
Housing units per capita and house prices
Left scale: Annual percentage change in housing units per capita
Right scale: Annual percentage change in house prices
30%
0.8%
0.6
20
0.4
0.2
10
0.0
0
-0.2
-0.4
-10
-0.6
1993
1998
2003
2008
2013
2018
2022
THE GLOBE AND MAIL, SOURCE: CAPITAL ECONOMICS CALCULATIONS BASED ON DATA FROM REFINITIV AND OECD
“Supply and house prices were both responding to a different factor entirely, easier credit conditions,” he wrote, noting that mortgage growth hit a 14-year high in 2021 as households shifted to cheaper variable rate mortgages, and there was an increase in speculative activity as the rate of home flipping rose sharply.
Those conditions have reversed as the Bank of Canada raised interest rates, and while major lenders continued to extend financing last year when the job market was strong, that could change if the economy slows, Mr. Brown warned: “The reliance on credit to push up prices has left the housing market especially vulnerable to tighter credit conditions.”