![]() This is in fact a characteristic of a housing bubble and it doesn’t matter if the particular city has an elastic (easy to increase) or inelastic (hard to increase) supply of housing. The problem with this argument is that every single housing bubble in history has seen demand outpace supply. ![]() This argument, that lack of supply is the real problem, is a common one put forward by home builders and real estate agents. If demand is going up and supply is not, prices will go up, that’s not a bubble.” “I don’t think we’re in a bubble, I really don’t think we’re in a bubble. While the Bank of Canada is indirectly cautioning us about an investor-driven housing bubble in Canada, former CEO of CMHC Evan Siddall had this to say about a potential housing bubble in Canada : And it is this motive that is thought to lend instability to bubbles, a tendency to crash when the investment motive weakens.”īut not everyone agrees with these risks. “That is what a bubble is all about: buying for the future price increases rather than simply for the pleasure of occupying the home. In the case of a housing bubble more specifically (as compared to other asset bubbles), a disproportionate increase in demand from investors vs end user home buyers is a defining characteristic, according to Robert Shiller and Karl Case: “f the reason that the price is high today is only because investors believe that the selling price will be high tomorrow-when "fundamental" factors do not seem to justify such a price-then a bubble exists…” While Beaudry didn’t refer to Canada’s housing market as a bubble, central bankers rarely do, his description of Canada’s housing market was pretty much the definition of a bubble.Ī surge in demand driven by the extrapolative expectations of investors echoes Joseph Stiglitz’s definition of a bubble: The Bank of Canada’s research found that home purchases by investors outpaced demand from first-time and repeat home buyers. That’s because, for many households, their wealth and access to low-cost credit are tied to the value of their home. And, if one occurs, the damage can spread far beyond the investors. That can expose the market to a higher chance of a correction. In such a case, expectations of future price increases can become self-fulfilling, at least for a while. Expectations of a capital gain can make homes a very attractive asset for investors.Ī sudden influx of investors in the housing market likely contributed to the rapid price increases we saw earlier this year. This happens when people think house prices will be even higher in the future, and it can lead them to rush into the market to buy.Īt the same time, our analysis finds that many Canadians are buying homes as investment properties-that is, in addition to their principal residence-and the importance of this phenomenon has grown. My observations turned out to be prescient as later that same month the Bank of Canada’s Deputy Governor Paul Beaudry highlighted many of the same risks in his speech titled, “ Financial stability through the pandemic and beyond.”Ī particularly worrisome development is that price expectations in some areas may have become extrapolative. In last month’s report, I discussed how the housing market on the ground in the Toronto area appears to have turned while much of the demand in 2020 was driven by end users rushing into the market post-Covid lockdowns, 2021 has seen a surge in demand from investors looking to capitalize on rapidly rising home prices. With home prices continuing to surge across the country, many are starting to wonder if the rational explanation we’ve been hearing for Canada’s housing boom - an urban exodus and surge of end-users buying homes due to the Covid-19 pandemic - no longer applies. ![]() ![]() Why a change who's behind the demand for homes makes all the difference. ![]()
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