For nearly two decades, the Canadian housing market has been in one of the largest speculative bubbles across the world. Starting in 2002, a flurry of investment activity emerged due to low interest rates. Moreover, the economy experienced strong growth, recovering from the recession in the 1990s, which resulted in more emerging cities. The confluence of events has caused in the Canadian house price index to increase an annualized 4.7% between 2002 and 2021, while interest rates fell an annualized 11.3% during the same period.
The coronavirus pandemic has further propelled this bubble as growing demand for larger houses drove property values, interest rates approached the zero lower bound and a housing supply shortage caused real estate values to rise. As a result, the Canadian house price index increased an annualized 4.3% over the five years to 2021.
Government intervention
Due to rising home values and demand for homeownership over the past two decades, the federal government intervened by introducing the National Housing Strategy (NHS) in 2017. Initially, this strategy set out to invest $40.0 billion during a 10-year period to help reduce homelessness and improve the affordability, availability and quality of housing for Canadians in need.
However, the NHS now expects more than $70.0 billion in funding to help strengthen the middle class and fuel economic growth following the coronavirus pandemic. In addition, the Canada Mortgage and Housing Corporation (CMHC) has set a goal to have affordable housing available for all Canadians by 2030.
Commercial banks append
As the coronavirus pandemic further propelled the Canadian housing market into a spiral due to monetary easing, the federal government was forced to intervene and tighten its monetary policies. However, since the housing market reacts slowly to changes in monetary policies, some commercial banks have gotten involved to help bolster the availability of affordable housing. For example, in April 2021, Scotiabank announced that it will team up with the CMHC to assist in building affordable housing by providing $10.0 billion in funding in additional financing on top of the NHS investment.
In addition, the Bank of Montreal (BMO) announced that it will make an extra $12.0 billion in financing available to developers of affordable housing in August 2021. This additional funding is on top of the annual $1.0 billion the BMO already lends out for affordable housing. This financing is expected to support clients that finance the development or refurbishment of affordable housing.
How will increasing supply help?
The need for affordable housing is prominent in Canada as housing prices endured a massive uptick in 2020. In fact, according to a 2021 report by the Global Property Guide, house prices in 11 major Canadian cities rose 9.4% in 2020 alone. Although there are many drivers for increasing property values, one of the largest influences can be attributed to the lack of housing inventory in 2020.
With the NHS’s goal of increasing inventory, the housing market is expected to steadily move back toward equilibrium. With increased supply, houses are expected linger on the market for longer periods of time, which will likely prompt sellers to be more willing to negotiate and lower prices. In addition, as demand begins to cool and the number of buyers dwindle, housing prices are expected to further decrease and slowly stabilize. Overall, federal programs such as the NHS and the aid from commercial banks are expected to help slowly deflate Canada’s speculative housing bubble.
