About That Supply Problem…

Looking through the latest Housing Market Insight report from CMHC, I found some interesting data on foreign buyers.

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In 2014, foreign residents owned 2.3% of Vancouver’s 203,824 condominium units — 4,688. In 2015, they owned 3.5% of 210,696 units — 7,374. For the year, total supply increased by 6,872, while foreign owners increased their total by 2,686.

This means foreign residents bought 39% of added condominium supply! It also looks like a similar situation happening in Toronto.

This explains why, even though housing starts have been strong for several years, current housing market inventory is very low.

It’s foreign demand, stupid.


Is it supply? Are we stupid?

Many involved in the Vancouver housing affordability discussion think the problem is that we aren’t building enough homes. They look at active listings — which are indeed low — and conclude we have a supply problem.


Last month, B.C. Finance Minister Mike de Jong said,

“I don’t believe the answer is to try and artificially constrain demand whether it is from within the country, within the province or internationally. I think the answer is for us to work together as governments and increase supply.”

On June 2, at the UDI Luncheon, Bob Rennie went as far as saying, “only supply will cool the market”.

Over on Twitter, urban development specialist Bob Ransford’s favourite hashtag is #ItsSupplyStupid.

Well, is it supply? Are we stupid?

Here are the housing start numbers from CMHC. It certainly doesn’t look like a supply problem!


Maybe this supposed supply problem is really a demand problem? When housing markets are overheated, sellers are reluctant to sell and fence-sitters jump into the market because of their fear of missing out. Just look at what happened to supply in Phoenix in 2005 when their market went nuts. Inventory dropped to historic lows, from over 25,000 to under 10,000 in less than a year.


I’ll bet the Bob Rennies and Mike de Jongs of Phoenix were complaining about a supply problem too. But once the market slowed, look how fast supply magically appeared!  From under 10,000 to over 40,000 in a year. That’s what happens when a market turns. Buyer’s fear of missing out turns into fear of losing money. And developers, thinking more supply is needed, ramp-up activity. As a result, sales numbers fall and inventory takes off.

What might have looked like a shortage was really excessive demand. Based on the housing start numbers, it’s reasonable to conclude the same is true today in Vancouver. Maybe it’s demand, stupid?

The Speculative Episode

Bubbles — like the current Vancouver housing bubble — are nothing new. Contrary to the views of some, markets are not efficient and are frequently irrational.

Few understood this better than John Kenneth Galbraith. Over twenty years ago in, A Short History of Financial Euphoria, he gave an excellent summary of how they occur.

And as the following section presciently concludes, “There will be occasion to see the operation of this rule frequently repeated.”

Chapter 1 – The Speculative Episode

That the free-enterprise economy is given to recurrent episodes of speculation will be agreed. These–great events and small, involving bank notes, securities, real estate, art and other assets or objects–are, over the years and centuries, part of history. What have not been sufficiently analyzed are the features common to these episodes, the things that signal their certain return and have thus the considerable practical value of aiding understanding and prediction. Regulation and more orthodox economic knowledge are not what protect the individual and the financial institution when euphoria returns, leading on as it does to wonder at the increase in values and wealth, to the rush to participate that drives up prices, and to the eventual crash and its sullen and painful aftermath. There is protection only in a clear perception of the characteristics common to these flights into what must conservatively be described as mass insanity. Only then is the investor warned and saved.

There are, however, few matters on which such a warning is less welcomed. In the short run, it will be said to be an attack, motivated by either deficient understanding or uncontrolled envy, on the wonderful process of enrichment. More durably, it will be thought to demonstrate a lack of faith in the inherent wisdom of the market itself.

The more obvious features of the speculative episode are manifestly clear to anyone open to understanding. Some artifact or some development, seemingly new and desirable–tulips in Holland, gold in Louisiana, real estate in Florida, the superb economic designs of Ronald Reagan–captures the financial mind or perhaps, more accurately, what so passes. The price of the object of speculation goes up. Securities, land, objets d’art, and other property, when bought today, are worth more tomorrow. This increase and the prospect attract new buyers; the new buyers assure a further increase. Yet more are attracted; yet more buy; the increase continues. The speculation building on itself provides its own momentum.

This process, once it is recognized, is clearly evident, and especially so after the fact. So also, if more subjectively, are the basic attitudes of the participants. These take two forms. There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect the market to stay up and go up, perhaps indefinitely. It is adjusting to a new situation, a new world of greatly, even infinitely increasing returns and resulting values. Then there are those, superficially more astute and generally fewer in number, who perceive or believe themselves to perceive the speculative mood of the moment. They are in to ride the upward wave; their particular genius, they are convinced, will allow them to get out before the speculation runs its course. They will get the maximum reward from the increase as it continues; they will be out before the eventual fall.

For built into this situation is the eventual and inevitable fall. Built in also is the circumstance that it cannot come gently or gradually. When it comes, it bears the grim face of disaster. That is because both of the groups of participants in the speculative situation are programmed for sudden efforts at escape. Something, it matters little what–although it will always be much debated–triggers the ultimate reversal. Those who had been riding the upward wave decide now is the time to get out. Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. Thus the collapse. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang. There will be occasion to see the operation of this rule frequently repeated.