Canada is in the midst of a major housing crisis — not only for buyers, but for homeowners as well.
For much of the past decade, Canadian house prices have been rising faster than incomes. According to Mortgage Broker News, house prices have risen 41.9% faster than wages since 2015. That means that houses have become less affordable over the last seven years.
This year, the house price gains have been reversing. Since the peak in February, prices have fallen 18.5%, or $150,000. That sounds like a good thing, but it creates another problem: people who already own homes are seeing their net worth decrease. Those with floating mortgages — mortgages where the interest rate changes — are seeing higher interest payments, too.
So, Canada’s housing crisis is no longer just about young people being unable to buy. Thanks to rising interest rates, homeowners are feeling the squeeze as well.
It won’t be easy to find a way out of this crisis. Moreover, a recent BMO (TSX: BMO)(NYSE: BMO) study cast doubt on one of the factors commonly used to explain it: housing supply.
Typically, Canada’s lack of available housing has been cited as a reason for the high prices. The population is rising faster than the number of houses, so prices are rising — or so the theory went. It was a logical sounding explanation for the high housing costs. But BMO’s study suggests that it may not be accurate.
Why there isn’t really a housing shortage
According to BMO’s economists, Canada’s housing bubble was driven by speculation, not shortages. The study showed that there were enough houses for everyone, even at the height of the bubble, but that investors were buying extra homes, hoping the prices would rise. It wasn’t just foreign investors either. BMO’s research showed that many Canadians bought up second or even third homes, sometimes to rent them out, other times just hoping to sell to someone else at a higher price. The result was a bubble — a sustained increase in prices in a short amount of time.
Are banks to blame?
When housing crises emerge, many people are quick to blame banks for the contagion. In 2008, when the U.S. housing market collapsed, many people blamed the U.S. banks, which were giving out mortgages to people who weren’t creditworthy. Eventually, people couldn’t pay their loans. By the time all was said and done, $13 trillion in net worth was wiped out.
Is it possible that Canadian banks are repeating America’s mistakes?
If you look at a bank like Royal Bank of Canada (TSX: RY)(NYSE: RY), you will see that it did indeed issue many mortgages during the housing bubble. According to RY’s 2021 annual report, its loan portfolio increased 7% that year, driven mainly by mortgages. If BMO is right, then the mortgage growth that year happened because of a housing bubble.
So, yes, Royal Bank and other banks were participating in a bubble. However, they aren’t completely to blame. Central bank policies like low interest rates facilitated the rush to acquire houses in 2020 and 2021. The commercial banks, like RY, were just responding to those policies. Since 2021, interest rates have risen, and banks are now required to more rigorously scrutinize peoples’ finances before giving them mortgages (the “mortgage stress test”). So, it appears unlikely that Canada’s banks will cause a true housing market meltdown.
