Canada’s busy Spring market hasn’t begun with the typical flood of sellers. BMO Capital Markets warned investors a lack of new listings for sale might be a bigger problem than low sales. They attribute this to a number of factors, but they all boil down to one issue—there’s little reason to sell. Canada is hitting property with stimulus less than one year after the market began to slide.
Canadian Real Estate Sellers Aren’t Listing As Fast As Usual
Canadian real estate sellers typically wait until the Spring market to list, but it’s so far been slow. New listings fell in both Toronto (-44%) and Vancouver (-34%) in March, two trend leading markets. Other regions have yet to report, but brokers around the country indicate the mid-month data will show sellers were scarce in every market.
Source: BMO Capital Markets; TRREB.
BMO economist Robert Kavcic warned this might be a bigger story in Toronto than a lack of sales. Addressing investors, he warned the region had the slowest month for new listings since 2001, helping to tighten the market.
Here’s a few insights he mentions as potential reasons for the slowdown:
- They don’t want to sell in a down market, and don’t have to.
- This is an asset price correction, not a recession that comes with job losses and forced selling.
- The mortgage market has a major buffer with most owners facing little to no payment stress.
- OSFI stress tested buyers, preventing forced sales.
- Cost of moving/trading is excessive, so people are staying put.
- Investors have a strong rental market to fall back on.
Buying Or Selling An Asset Requires Motivation
All great points, with incentive being the key factor behind most. In every asset market, owners will hold onto the asset for as long as they are motivated to do so. If you had a magic piece of paper that gave you $20k/month, would you sell it? Probably not. More likely you’ll try to leverage the paper’s value to get more magic pieces of paper.
A good chunk of investors are purchasing negative cash flow properties. This is when the tenant’s rent isn’t sufficient to cover the carrying costs paid, so the speculator/landlord has to top up the payments. Even in this scenario, the minor pain of topping up rents has been lucrative for investors due to inflated equity.
By hodling holding, the market experiences a distinct acute shortage, helping to push prices even higher. Higher prices mean more holding excess, which in turn leads to even tighter inventory.
In contrast, when prices are falling a sudden surge of inventory typically appears. You don’t make any profits until you sell, and it’s quite motivating to get ahead of seeing your gains wiped out. The increased inventory helps push prices even lower, increasing the amount of inventory flows. Momentum in either direction can trigger major trend changes, especially with a financialized asset.
Most people tend to look at housing as an investment, and then try to analyze its supply and price trends like a necessity. There are x number of people that need a house, so they’ll bid on y number of units. Investments don’t work that way, the price is based on the amount it can be liquidated for. It’s physically impossible to build enough “affordable” housing, since investors are looking at return potential through asset inflation.
Higher interest rates typically bring home prices down by throttling the leverage that can be used to buy. Central banks are supposed to act as a lender of last resort, responding to emergencies. Governments are only supposed to provide investment stimulus when there’s a prolonged lack of investment, not because they can. That’s not how anything has operated since the Global Financial Crisis.
When interest rates began to climb, they predictably throttled credit and brought home prices lower. However, less than a year later, Canada is demonstrating it doesn’t have the appetite to follow through on tough love. Now the market is salivating after a banking liquidity crisis reinforced moral hazard by hinting that credit stimulus is just around the corner. Add to that, the Federal government’s expansion of subsidized demand, and opening the market up to global investment days after deeming it necessary to restrict.
Investors are getting the message loud and clear—Canada can’t do much other than trade houses. It couldn’t last a whole year without applying stimulus, so the incentive to hold onto your inventory is greater than any correcting factor at this point. If your government is essentially an army of real estate investors, why would anyone sell before they do? They’ll bet the whole financial system on inflating the asset they also have a vested interest in.
