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Did Realtors Cause the Housing Market Boom in Canada?

 

Are Realtors the problem?  Did we Realtors somehow cause these huge increases in housing prices?  So I did my best to look at this impartially to say ok – do we, do I, have a hand in this, and if so, how?


Let’s look at what causes prices to rise.  This doesn’t matter what it is – whether it’s a commodity on the stock market, or a car, or a house – what causes prices to rise. And this is when we have to go to our Economics graphs and examine one of the basic laws of Economics and that is the law of supply and demand.  


If you watch or listen to anyone who knows anything about the real estate market, this outlines exactly our problem right now and why prices are increasing – demand is too high and supply is simply too low.  There’s not enough building for the demand being created.  If you look at this economic graph, on the one axis we have supply and on the other we have demand.  Where these two intersect is price.  As demand goes up, even if supply stayed the same, the price would go up.  Alternatively, if supply goes down, even if demand stayed the same, the price would go up.  What we have right now is demand going up, and supply going down at the same time, so prices shoot up as we have experienced in the last few years in the Okanagan.


Until the supply number comes up or the demand number comes down or both, prices will keep going up.  That’s the way it works, the law of supply and demand.  


This leads us to the question posed by this video, are Realtors responsible for the demand increasing or the supply decreasing, or both?  So I did a few simple Google searches to investigate and want to share with you what is said impartially online.


Let’s start by having a look at some of the factors that have come into play in Canada to increase the demand of housing, why is there so much demand? 


1. Reason number one: Low-Interest rates.  
That is a huge factor.  Low-interest rates are used to stimulate the economy and that is what’s happening, home buyers are stimulated to purchase properties that they otherwise would not or could not afford with higher interest rates because higher interest rates translate into higher house payments.  So buyers’ purchasing power has gone up.  Right now you have people who are buying, maybe first time home buyers or move-up buyers who would normally have stayed put or stayed renting, however with the lower interest rates and the lower house payments, took that opportunity to buy into the market, or sell their first home and buy their second larger home for example.  And this goes further – because the second set of buyers that lower rates fuel is investment buyers.  Investors have been looking at the low rates, and the saying ok, with these low mortgage payments, this is a good investment, it’s a good use of my money.  If an investor has some spare money, they may as well invest it in real estate because they can’t make any money investing it in the bank.  Interest rates are too low, investing in an interest-bearing anything won’t keep up with inflation, you’re in the hole! So investing in real estate has been a good use of investors’ money.  There are new investors in the market too – those who have looked at the equity in their house and borrowed against their own home to buy a rental property. Again, these people are looking at the numbers, they bought for say $400, now their house is worth $700, so they can take say $150,000 out of their home equity, and finance another house as an investment.  Why not, money is cheap.  Canada is the only country in the world that is keeping its interest rates very low. All other countries including the United States are raising interest rates.
 
2. Immigration.
According to what I have read, and this graph from Statistics Canada shows, from the 1970s until the 2000s, population growth averaged about 3.1 million per decade but in the 10 years from 2010 to 2019, population growth surged to four million in that decade.  In 2020, Canada welcomed 174,000 immigrants which were down because of Covid travel restrictions, but the plan was to welcome 341,000, and in 2021, 401,000 permanent residents which is The highest immigration year on record and Canada plans for the same, 401,000 new permanent residents in 2022 and 2023.   These new Canadian permanent residents obviously need housing.  Some of these immigrants are quite wealthy and have come to Canada via the paid immigration program where people can invest $1.6M in Canadian bonds and obtain Citizenship in Canada.  The problem is that local Canadians are not able to compete with that kind of wealth and are getting displaced as a result. Even the immigrants who are not wealthy are then renting in large numbers which are indirectly driving up the prices of real estate and certainly the rental prices. 

3. Let’s talk about the Millennials.
Millennials are now buying their first homes.  At 9.8 million strong in Canada along, millennials account for the largest share of Canada's population. So the sheer size is going to dominate Canada’s future just as the baby boom generation did the past three decades. These millennials have been entering the home-buying age, and because most of them were living at home saving money and then the pandemic hit and they weren’t spending money on going out and traveling, they were saving for downpayments and many of them were able to be gifts downpayments from their baby boomer parents who have a large portion of today’s wealth.  Nearly 48 percent of Canadians aged 25 to 35 currently own their home, and a quarter of these homeowners purchased a property during the coronavirus pandemic.  As mortgage rates fell to historically low levels and the competition for entry-level housing lessened and they had all this money saved up from not spending it on anything else, some millennials saw a window of opportunity and went for it.  The millennials were also much more comfortable buying online and using online resources than others, so the pandemic probably didn’t slow them down much.  All this unspent millennial money has found its way into real estate investments.
 
4. This brings us to the pandemic.
People have learned they can work from home, they can work remotely, and therefore that is definitely part of the cause for our increased real estate prices in the Okanagan.  People are now buying up houses in the Okanagan because now they are working from home and living where they want to not where they have to.  


Now let’s look at the other part of the equation, the supply portion.  As we said, demand is up,  way up, and that’s mostly the issue, however, there are still some supply issues as well.  If you go back to this graph we looked at earlier from Stats Canada, we looked at the rise in immigration, however, look at the new single-family house completions – down from 1.3 million to 1.1 million.  Why is that? A couple of reasons.  


  1. Covid affecting the supply chain.  And not just covid – how about material shortages due to the floods and landslides that kept construction materials stranded at the Port of Vancouver.  So when you can’t get the materials, and/or the cost of materials go sky-high,  it takes longer, gets more expensive, and therefore gets riskier for a builder to build.  There’s also a huge shortage of construction workers to build even if the materials arrive, so covid and other natural disasters haven’t been kind to the construction industry.    
  2. Government red tape makes building a huge pain in the rear.  It’s tough to have the patience to deal with the municipal governments to rezone, to get building permits, and then the cost of those things, in Vernon especially, the development costs are comparatively huge.  And from what I understand, that’s in many areas all over the country.  


So are Realtors to blame for this?  For supply and demand?  Well, if we recap the demand issues with interest rates, immigration, the millennials buying and the pandemic, I don’t know, maybe some of the realtors are millennials or investors and they are buying up some houses, or maybe they procreated some millennials and then they bought houses, but I think that’s a bit of a stretch.  With the shortage of supply, covid and supply chain issues, and government red tape, also I’m pretty sure Realtors didn’t cause any of that….


Be sure to watch our monthly market update videos on the market here in the Okanagan, and Bryanna - Have a nice day!

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