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Better Dwelling housing analyst Stephen Punwasi addressed the Canadian House of Commons Standing Committee on Finance this week. His comments elucidate why the number of Canadians expecting to buy a home has fallen by a third in 2022 and why the solution to unaffordable housing is less credit, not more supply.  Read:  Better Dwellings Opening Statement Before the Senate Standing Committee on Finance.  Here’s a taste:

A few months ago, the Bank of Canada set out to prove low rates lowered the cost of housing, and whoops, not what happens. They found consumers adjust their budget to incorporate the excess credit available, thus inflating the price of homes for everyone. Buyers didn’t see lower carrying costs, but they paid a larger principal. For the past 30 years, central banks thought they were making housing more affordable with lower rates. It turns out no one did the math until recently.

Why are these points important? In October, Canadian inflation was at 4.7 points — more than double the target rate. Remember the QE program mentioned earlier? The one with the single purpose of creating more inflation? It was still running at this point, as Canada’s banks literally wrote to clients to say the central bank was recklessly ignoring its own research.

It’s like the Bank of Canada is stepping on the gas and saying the car won’t slow down due to external factors. There is a supply shortage failing to meet demand, is the narrative.

Let’s talk about that demand quickly. This isn’t regular demand, but demand stimulated by low interest rates. BMO estimates a third of existing home sales are “excess” due to low rate stimulus. Sales are just off the record high, not an economically repressed level that needs stimulus. Low rates don’t stimulate selling, though. It only creates more competition to inflate prices.

As with every other housing bubble in history, a whole generation is destined to learn that home prices can and do drop, and yes, you can lose a lot when you buy (or refinance) high.  Homebuilders and homebuilder investors too; with North American new homes under construction at 50-year highs, publicly-traded homebuilder stocks have already fallen 25% since December.  Much more downside yet to come as the latest housing mania unravels.