Two Factors Behind the Demand and Supply Gap
You paid $305,000 for a house in the winter of 2020. Last month, your neighbour sold his home, identical to yours, for almost $400,000, a difference of nearly $100,000. How is this possible? The principal reason is that the supply of homes for sale is shrinking, and this scarcity is driving prices up. This disparity between supply and demand is due to two main factors: low interest rates and changes in people’s housing needs, all of which is a consequence of the pandemic we are living through.
—Factor #1: Low Interest Rates
The first reason there is such a difference between supply and demand is the low mortgage interest rates. While you may have purchased your first home in 1990 with a 13% mortgage rate, in the past year some have signed their first mortgage with a rate varying between 1.5% and 2.5%. The Bank of Canada decided to slash the rate at the outset of the pandemic to stimulate the economy. As a result, thanks to these low rates, people can now afford a mortgage that is 20% higher than in 2019. Moreover, according to Statistics Canada, despite the many job losses in 2020, Canadian household disposable income jumped 10.6% in the third quarter of 2020 compared to the same period in 2019.
No wonder so many are tempted to swap their little city apartment for a house in the suburbs. Indeed, according to a report published by JLR, there was a 6.9% rise in the number of mortgage contracts—that is, an increase of 246,000 contracts— signed at banking institutions between 2018 and 2019.