Buyer's Fear of Missing Out

It’s clear that the pandemic likely won’t be causing a double-digit percentage drop in Canadian home prices as some economists had predicted back in 2020.

The market is now confronting a potential scenario that sees home prices continuing to rise rapidly across the country, setting housing on a path to overheating.

How much housing prices have risen since 1940

RBC Senior Economist Robert Hogue wrote this week that COVID-19 “wasn’t the much-feared Armageddon for Canada’s housing market.” Government aid, support from financial institutions through mortgage deferral programs and record-low interest rates all played a role in keeping the market above water and setting it on a course for a robust rebound, Hogue wrote.

Since the recovery began in early summer 2020, homebuyers have rushed into the market, with major centres like Toronto, Vancouver and Montreal all seeing remarkable monthly transaction totals with housing supply lagging far behind demand.

“Super-strong demand is quickly depleting inventories across the country. Competition between buyers is extremely fierce in many markets (including smaller ones), and a ‘fear of missing out’ is taking hold,” Hogue wrote.

The economist says that, when introduced into the housing market, the fear of missing out dynamic often leads to “self-reinforcing price trends.” In other words, home buyers — or in some cases, real estate investors — believe that prices will continue to rise indefinitely. This view pushes more buyers into the market and further perpetuates rapid price growth for a period of time.

This dynamic negatively impacts housing affordability and could lead to future market volatility and even a sharp price correction in the future.

For Hogue, the primary risk in the short-term is Canada’s housing market overheats, rather than collapses. This risk could spur governments to intervene as was the case in BC and Ontario in 2016 and 2017, respectively. It could also contribute to triggering a faster-than-expected rise in interest rates, which would deter some buyers from entering the market.

Hogue is far from the only commentator keeping an eye on an overheating scenario for the Canadian housing market.

Bank of Canada Governor Tiff Macklem told reporters in February that his team was monitoring the housing market for signs of overheating.

Writing last month about Toronto’s red-hot single-family home market, Realosophy President John Pasalis said he hoped to see the run-up of prices graduall cool in the coming months in the interest of keeping the market stable.

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