Who Repealed the Law of Supply and Demand?


If you want to pay less mortgage interest, it helps to have a cheaper home. If you want a cheaper home, it helps if there are more homes than people want to buy. Cue the Economics 101 reference.

Yet, there are some who’d like us to believe that demand, not supply, is the problem. As if not having enough homes to satisfy high demand is irrelevant. As if demand — i.e., people who want a roof over their heads — can be magically diminished through policy to keep prices lower indefinitely, despite population growth, wide-open immigration floodgates (in non-COVID times) and so on. Such economically preposterous attempts at proselytizing the ignorant rank about as high on the absurdity meter as one can get.

Why is the price of anything bid to extremes? Because there’s not enough of it, or there’s a perception that there’s not enough of it. This characterizes Canada’s housing market to a T.

It’s an entirely different conversation when demand and supply are in equilibrium. One could be offered minus 2% interest rates. Banks could pay you $500 a month on your mortgage, and if there were hypothetically enough suitable homes for every single Canadian household in the locations where they wanted to live, that extraordinary supply-inducing interest rate would barely move home prices.

Back in reality, COVID has taken Canada’s supply scarcity to a whole new level. “There were just 2.6 months of inventory on a national basis at the end of August 2020 – the lowest reading on record…,” reports CREA. “At the local market level, a number of Ontario markets are now into weeks of inventory rather than months.” It’s hard to convey how abnormal that is.

Until this problem is corrected, prices could keep rising like a helium balloon. But, knowing that credit availability and falling rates fuel home prices, is the answer then to crimp demand through mortgage tightening or artificial, ill-timed rate hikes? Certainly not. Not unless the goals are creating imbalances in the rental market and fuelling unemployment.

Most credible sources, including CMHC, know that regional shortages of affordable housing (particularly high-density housing) is a key problem. The likes of the Fraser Institute further corroborate the obvious: “…Demand-reducing policies have seemingly done little to restore broad housing affordability. The laws of supply and demand apply to housing, like any other good. By focusing primarily on demand, policy-makers ignore half of the equation…”

On that note, an IMF report last October had a radical solution to Canada’s housing crisis: “To Tackle Housing Affordability in Canada, Build More Houses.” Hey, they might be onto something.

In truth, there’s no easy cure that doesn’t disadvantage someone. Real progress takes hard fixes, like incentivizing more homes within tolerable commutes to job centres, building ultra-high-speed transit to regions with cheaper land, or other capital, time or bureaucratic-intensive solutions. Or maybe it takes more out-of-the-box thinking, like government land acquisition partnerships or near-interest free financing to developers that build strategic high-density housing in/near public transportation corridors.

The Department of Finance has said it many times; home construction is “needed to address…housing supply shortages in Canada, particularly in our largest cities.” The 2019 Federal Budget stated that increasing the supply of housing “is the most effective way to address affordability in the long run.” Righto. Because whatever the solution, supply is the problem, and it has been for 20 years.

Views expressed here are solely those of the author and do not necessarily reflect the opinions of any other party.


  • WillyBaldy says:

    Great commentary Spy. The only thing that bugs me with this text is that there’s no clear differentiator between properties bought for living purpose versus those bought for investment purpose. Is there really a shortage of properties because people want to move to a house or condo from rental, or is there a rush of people trying to invest in real estate because of low interest rates and quantitative easing? I think it makes a big difference in policy making.

    • The Spy says:

      Thanks WillyBaldy,

      Not sure if you’re talking about income property investors. Let’s suppose you are because the investment motives of owner-occupiers are a minority of the reason they buy, according to surveys.

      Let’s start off by remembering, there have always been investors.

      They’ve always competed with owner-occupiers and they always will.

      Many charge investors with amplifying price volatility in the short run (which can admittedly fuel booms). Those same folks unfortunately discount all the useful functions of investors over the long run (improving properties, providing rental accommodation, rejuvenating old neighbourhoods, improving liquidity—especially after selloffs, supporting development, keeping prices efficient—i.e., in line with fundamentals, and so on).

      The main concern with investors and speculation is when you see a spike in such activity. In the last year overall, we’ve seen little evidence of that. But even if such evidence arose, it tells us nothing about the impact investors will have in the future.
      Investors buy to earn a target rate of return over their anticipated holding period. Not surprisingly, investor ownership has increased over the long term as interest rates decreased. The more rates fall, the lower their carrying costs and the more investors contribute to price appreciation. Likewise, the stronger the rental market, the greater their projected returns and the more they contribute to price appreciation.

      This is just the natural functioning of any real estate market. It’s important to realize that, and important to avoid confusing cause and effect. The effect investors have had on our housing market has unquestionably been magnified by recurrent supply shortages. Investors shouldn’t be vilified for wanting to buy before prices increase due to inadequate supply. They’re acting like any rational homebuyer.

      The higher prices get, the more some want to find scapegoats. But knee-jerk anti-investor policy is always ill-advised. A National Bureau of Economic Research paper noted in 2011, “Restricting investor activity may significantly harm the functioning of the market.” That’s a big reason why the FHA reversed its 2006 restrictions on financing homes flippers.

      Looking ahead, investors may play a less impactful role. Rates have been falling for four decades. Now they’re near the floor. In the not too distant future, the market will largely price in near-zero rates and carrying costs will be far less of a price driver.
      As for rents, we all know what’s happening there: https://www.thewhig.com/executive/executive-summary/posthaste-rents-in-canadas-two-most-expensive-cities-are-dropping-at-record-rates/wcm/d3b71550-a97d-4838-8864-e1a1c234e0ef?video_autoplay=true. The temporary rental rate nosedive is motivating investors to add to supply in some tight markets.

      As for expectations of higher prices driving investors, those too are a function of the demand/supply imbalance. Fix the denominator and the numerator takes care of itself. Or to put it differently, solve for supply and you solve any speculation problem.

  • david says:

    I wont comment on the article that gave rise to this post. But is it reasonable to conclude that, notwithstanding how fast or slow supply can catch up (can it ever??), a multi year (or even multi decade) period of near zero rates could reasonably be expected to require demand side policies to avoid excessive borrowing and constant upward pressure on prices? Or do you subscribe to the view that zero rates do not need any form of mitigation, and if supply is slow to catch up then so be it (prices rise, OK, highly indebted borrowers, OK).

    • The Spy says:

      Hey David, Great question on whether supply can catch up. I think the answer is yes, in time. The stimulative effect of low rates will fade in coming years given we’ve almost hit bottom. The last little spurt will occur after bond yields eventually go negative–which may or may not be in this cycle.

      The key to remember about the rate/home price relationship is that low and falling rates fuel home prices much more than just low rates. It’s hard to fall significantly further when you’re already at zero.

      Obviously we’ll also have more people living further out from major metros. That’ll partially alleviate big city supply constraints, to some degree, for some amount of time.

      And of course, high prices, government supply-side policy and government transit policy will all beget supply creation.

      The main issue with artificial policy constraints on demand (and there are multiple issues) is that it simply shifts the problem, it doesn’t solve it. If people can’t qualify for a traditional mortgage, most will rent. Or worse, they’ll get an expensive non-prime mortgage and over-lever. Policies that strain the rental market have a host of adverse spin-off effects (higher rental rates, lower overall consumption, the employment hit from lost home sales, and so on).

  • mguy70 says:

    It is so obvious by now that no amount of demand throttling will stop home prices unless you want to shut down the economy. Everybody knows this but ineffective leadership has repeatedly failed to herd the cats required for supply solutions. Hopefully whoever replaces CMHC’s twitter king has more success with this.

  • David64 says:

    Hi Spy,
    What is your prediction for the next 3 to 6 months when mortgage deferrals and CERB money are done? Is it going to help supply by forcing more homes/condos coming to the market due to owner not being able to afford it any more? Specially for short term rental places like airBnB.

  • I Could Be Wrong says:

    Sheesh, Spy, I was a fan before but you are on fire lately! Well said.

    WillyBaldy, I think between this article and your comment I just figured out that the phrase “policy making” is actually be a euphemism for “futzing with supply and demand”. Mind blown… but I don’t think the distinction you bring up matters because Canada is a tiny market overall and there are 190+ other countries trying to send some % of their youth and money here for a better future. Water flows downhill. By which I mean capital and talent flow to where they can be best deployed and for some % of it globally, Canada is an attractive spot. A temporary lid on immigration will only mean the investment share increases vs actual live-in ownership.

    David, low rates are a global phenomenon. We’re the tail, not the dog. BoC can say what they want but the government cannot afford higher rates, does not need to pay higher rates to attract capital, and needs-wants to borrow-spend at historic levels going forward. Ultimately capital markets will decide rates and housing, as significant as it is to all of us, is only one column in that infinite spreadsheet.

    mguy70 I agree demand throttling is, well, nuts. I hope you’re right and supply solutions come into play, especially zoning changes to allow more affordable housing — not just high-density as in condo towers but also smaller houses, tiny house developments, and “granny flats”. For anyone not familiar with that term: https://www.sagecottagearchitects.com/what-is-a-granny-flat/

    David64 I know you weren’t asking me, but I suspect the haves will buy from the have-nots. Same as it ever was. Some portion of the current HELOC and refi madness will absolutely be aimed at investment properties as a hedge against inflation fears.

    But this is not my site… back to you Spy, and thank you for this fabulous resource.


  • TackRight says:

    A lot of crybabies who can’t get into the housing market blame the real estate and mortgage establishment for their inability to buy. They’ve been doing that for years and guess what, it’s not helping. It doesn’t surprise me one bit to see guys like Josh Gordon pandering to those people with asinine opinion columns like the one you reference. His one-sided fallacious arguments are an insult to all educated readers of the globe and mail unfortunate enough to have wasted their time reading them.

  • WillyBaldy says:

    Thanks Spy for your great response, your input is always a pleasure to read. Good feedback from readers too.

  • Leo S says:

    Thanks for this. That article in the G&M got my blood boiling. Had to write a rebuttal myself: https://househuntvictoria.ca/2020/09/13/supply-is-not-the-problem-a-rebuttal/

  • MProf says:

    What ill-timed satire from Jeff Gordan. Amid a staggering shortage of listings he writes: the “supply narrative has been endlessly repeated” but “there’s no good evidence for it.” This is the guy teaching our youth public policy? I thought social science followed the scientific method, the first rule of which is don’t ignore obvious evidence.

  • Appraiser says:

    @Leo S: Excellent rebuttal article. Thorough, concise and accurate.

  • dingo says:

    ” BoC can say what they want but the government cannot afford higher rates, does not need to pay higher rates to attract capital”

    Hold that thought for Justin’s throne speech giveaway next week.

  • Appraiser says:

    Great article Spy:

    If there has been one constant in the GVA & GTA resale and new home market for far too long, it is a chronic shortage of supply.

    Low rise and high-rise price history is undeniably strong evidence of demand consistently overwhelming supply.

    I agree. It’s not more complicated than that.

  • zork says:

    Housing supply has multiple variables – it clearly does not strictly follow physical residential building levels. Many factors form supply in addition to the total number of residential units. Unemployment levels, municipal zoning regulations, interest rates, tax rates, tax evasion, money laundering, foreign capital feeding vacant land banking, Airbnb, immigration rates and foreign student levels.

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