BEYOND THE BUBBLE

Many in the real estate industry have cautioned against the continued investment in the housing market. They claim overheating areas like Ottawa and Calgary can’t sustain growth, and the usual mentions of Toronto and Vancouver are thrown around as prime examples of a bubble set to burst. However, this is the same refrain that “experts” have been echoing for the past 20 years.

Following the holidays, a wave of infections spurred a not-so-surprising second lockdown. This was on the heels of a Canadian GDP drop of 5.1% in 2020, the biggest in the country’s history. Conversely, the Canadian housing market saw another banner quarter and market analysts raised their predictions from a 4% nation-wide increase to 5%, a number that nearly mirrors the drop in economic output.

DEMAND OUTPACING SUPPLY

The factors fueling the growing hunger in the housing market are well-documented. “Historically low interest rates, changing housing needs, high household savings and improving consumer confidence will keep demand (for homes) supercharged,” said RBC senior economist Robert Hogue.

However, despite the wealth of elements driving record sales and pushing listing prices north of seven figures, we believe the single biggest issue facing the real estate industry is an absence of supply. And we’re not alone. Hogue continues to say “The main restraining factors will be a lack of supply, waning pandemic-induced market churn, a modest creep-up in interest rates and an erosion of affordability.”

CMHC POLICY PUSHES HIGHER PRICES

Canada Mortgage and Housing Corporation has a stated singular goal: “to make housing affordable for everyone in Canada.” This is a noble endeavour we whole heartedly support. Yet it seems strangely at odds with current CEO Evan Siddall’s recent decision to enact a series of policies that make buying a home more difficult for many Canadians. The most restrictive measure was the unnecessarily harsh “stress test” that made home ownership a fantasy despite basement dwelling fixed-rate mortgages. According to a Toronto Star article, this move alone reduced a family’s buying power by up to 20%. This ‘stress test’ was not the only CMHC change. During the first lockdown in June, the organization reduced families’ borrowing power thereby making it more difficult to qualify for mortgage insurance.

REAL ESTATE IS THE REAL DEAL

Basic economic theory outlines that when demand outweighs supply, price goes up. At the moment, the list of items on the demand side continues to grow. A Reuters poll predicts The Bank of Canada will keep its key interest rate unchanged at near-zero levels until at least 2024 thereby melting away any reasonable interest and with it any incentive to save. It also all but guarantees access to low-cost borrowing. Add that to a seemingly ever-expanding list of policies, procedures, and restrictions that make housing less affordable, and you’ve got a recipe for housing costs that will continue to climb. Wall Street may have seen a recent rash of unorthodox behaviour, but on your street, it’s business as usual.

Dorr Capital is a boutique mortgage investment corporation specializing in land and construction loans in the GTA. www.dorrcapital.com 416-484-9747.

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Update – June 29/2021

We have launched RealAlt Investments – a Mortgage Fund Trust, licensed under the Exempt Market Dealer, investing in Land & Construction development, building communities in Ontario. For more information please visit this web page on our site.