Canadian real estate prices are falling about as fast as they climbed earlier this year. BMO Capital Markets long maintained Canada didn’t have a housing shortage but an excess of exuberance. As price gains slow, they are proven right as more people now expect prices to fall instead of rise. Following today’s rate hike, the bank sees the last of Canada’s real estate bulls going extinct.
More People Expect Canadian Real Estate Prices To Fall Than Rise
A new Nanos poll reveals Canadians are quickly turning into real estate bears. Just 30% of Canadians expect real estate prices to rise, down from 70% at the boom’s peak. Meanwhile, BMO found that 33.3% feel prices will fall, up from the low of 5%, or “basically no one,” explains Robert Kavcic, a senior economist with the bank.
Much like the Bank of Canada (BoC) argues for inflation, sentiment influences price. If people believe prices will climb, they’re more easily convinced to pay higher prices. If they think prices will fall, they’re more likely to defer their purchase until it stops falling.
The Speculative Psychology Around Canadian Real Estate Is Fading
BMO is among many organizations saying we’re experiencing excess demand due to low rates. Speculative psychology, where buyers are paying higher prices with the expectation of prices continuing to rise at a breakneck speed, for no reason other than it always does. This is clear from the significant share of investors we’ve seen since rates were cut partly to help spark more investment in housing.
“We’ve argued all along that there was a major behavioral aspect to what was happening in Canadian housing, where acute price gains were not driven by supply shortages, but FOMO, speculation and investment activity,” says Kavcic.
“Indeed, the proof is that even just an initial nudge in interest rates was enough to crack expectations and trigger a correction.”
The bank sees today’s rate hike, which they expected to be smaller than it was, to knock out any of the remaining exuberance in the market.
