MNI INTERVIEW: FOMO Trumps BOC In Housing Market- Royal LePage

“Fear of missing out” and a low supply of homes is likely to fuel continued strong demand in Canada’s housing market even as the central bank raises interest rates further to fight inflation, a leading real estate executive told MNI.

Buyers are facing "an absolute supply crisis" and sellers have been outwaiting buyers through the Bank of Canada's interest-rate hikes, Royal LePage Real Estate Services COO Karen Yolevski said in an interview Friday. The central bank raised rates last week for a second straight meeting after signaling a pause early this year, an intermission that rekindled what the IMF says is about the world's most stretched housing market.

“They said we are going to stop raising rates and see what’s going to happen. That was the ignition that people needed, buy side, to come off the sidelines,” she said. “You’ve got buyers back in competition, competition is spurring prices to go back up and up, despite the fact that interest rates were higher.”

The unbalanced market means home prices will still climb 8.5% in the fourth quarter from a year earlier according to the realtor firm, which opened its doors in Canada in 1913 and has 20,000 employees across the country. Prices are climbing again in 94% of markets according to LePage's research, at a time when household debts exceed national GDP and mortgage rates surge alongside the Bank's 475bps of hikes.

BIDDING WARS

“There is some fear of missing out, and that’s driven primarily from scarcity,” she said when asked why the housing market hasn't been subdued by the biggest rate tightening in decades. “People are getting into bidding wars, that certainly drives up that fear of missing out, because they have missed out on previous homes.”

Besides that pent-up demand, buyers have the consolation of savings built up during the pandemic and a strong job market across the country, she said. That's encouraging younger buyers to move from the biggest cities that dominated the housing boom before Covid to smaller cities and towns, taking advantage of more remote work opportunities.

“If you look at Toronto as an example, you’ve got people now that have made a move two, two and a half hours away. That’s worth it for them if they are only coming into an office once or max twice a week,” Yolevski said. “The other thing that we are seeing is people just picking up and moving into secondary markets.”

FIRST STEP ON THE LADDER

Supply is also being squeezed because the price of homes an older couple might seek out as they downsize have been driven up, meaning more folks are staying in bigger houses than in the past, she said. Canada's population growth is also the fastest in half a century as the government boosts immigration, leading LePage to call for a focus on building rental homes.

“The policies we have in place right now, coupled with an already constrained supply, is creating an absolute supply crisis,” Yolevski said. “New Canadians will come to Canada and they will rent first. After a few years, they buy with more frequency than Canadian-born people. But you’ve got to get them that first step on the ladder.”

The Bank of Canada shouldn't be blamed for raising rates as part of its needed and bigger goal of getting inflation back to the 2% target, she said, even if more clients are venting about the cost of living. The Bank may not be able to offer much relief before mid-2025 when Governor Tiff Macklem says he will reach his inflation goal, she said. (See: MNI INTERVIEW: Canada Seen Hiking At Least 50BP More-WLU Prof)

“We shouldn’t forsake what we need to do to lower inflation just to ensure that housing continues to rip, that’s not a good economy," she said.