It's easy to become a bit parochial when you're looking at house prices – I do it myself. For example, you may look at house prices soaring in the UK, and think: “That'll be the stamp duty holiday. Plus a bit of a post-Brexit relief rally.”
And, depending on your point of view, you may throw in some equally UK-centric notion, such as our housebuilders are uniquely rubbish, or our population is uniquely NIMBY-ish, or something else specific to the dysfunctional British housing market.
But then you take a look at what's going on around the rest of the world. And you realise – Britain's house price boom just isn't that special.
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Canada's housing market had a record year
And so to Canada. Canada's housing market has apparently enjoyed its “hottest December ever”, according to Ari Altstedter and Erik Hertzberg on Bloomberg. That capped a record-breaking year: property sales for 2020 hit a record 551,392 units, according to the Canadian Real Estate Association. That's the biggest year for sales ever.
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Meanwhile, home prices rose at an annual rate of 13.1%. That makes Britain's high-to-mid-single digits growth (most of the big indices have it at around 6%-7% for 2020) look positively anaemic.
So what's happened in Canada? No stamp duty holiday there. I'm not au fait with Canadian property taxes, but, from a quick Google, it doesn't look as though there's been any major stimulus drive there. And prices have done well across the board, so no state stands out.
I don't think the economic situation is much better, either. Bear in mind that oil is one of Canada's key exports, so it hasn't exactly had a good year. Its GDP is expected to have shrunk by more than 5% in 2020. Unemployment peaked at over 13% in May, and it's still sitting at above 8%. So Covid-19 has hit Canada hard too.
On the effect of Covid, there is of course, one important shared characteristic with the UK (and everywhere else) – the urban exodus angle. If you think you're going to be working from home for good, then you want a bigger, nicer house to work in. And if you're saving a decent amount on commuting fees, you can probably pay for it, or move further out to get it. The biggest price gains – in the region of 30% apparently – were seen in “agricultural districts nearly two hours outside Toronto”. And you thought that folk moving from London to the more exotic parts of Kent were making a big move.
Bloomberg also points to a “historic dearth of housing supply across the country”, which is always brought up in relation to the UK, too. It's an interesting point, and one I'm not in any place to confirm or deny. I'd point out that Canada is much less densely populated than Britain, but that doesn't mean the availability of physical property can't still be struggling to keep up with demand (despite weak population growth).
All I'd point out is that “under supply” is a very convenient (and intuitive) excuse to alight upon to explain rising housing prices. So it'd be interesting to get a comparison with a country that unquestionably has enough housing. But does any country in the world have a historic over-supply of residential housing? Please do ping an email over to editor@moneyweek.com if you have any thoughts on that particular question.
Here's why house prices are so high everywhere
In any case, there's one much more obvious factor in common. It's got nothing to do with local politics, or physical supply and demand, or country-specific demographics, or taxes. It's one issue we've mentioned occasionally here before. You might have guessed what it is.
That's right – it's low interest rates. In Canada, banks are now “offering mortgage rates below 1% for the first time ever”, says Bloomberg. That's the story; that's what's driving prices higher.
The interest rate argument even helps to explain why Canada’s house prices have gone up even more rapidly than those in the UK. The UK didn't have a lot of room to cut this year – we started with the Bank of England rate at 0.75% and ended March with it sitting at 0.1%. By contrast, Canada's central bank started the year at 1.75%. By the end of March, that had fallen to 0.25%. That's a much more dramatic fall and certainly explains the frenzy.
Why do low interest rates have such a big effect on property prices? It's simple. When people buy houses, they care about two things: the deposit, and the monthly payment. The nominal price of the home is essentially irrelevant.
The deposit itself is viewed as hurdle to be overcome, rather than acting as any sort of sense-check – so either you can pay it or you can't. It's only really an issue for first-time buyers (hence their understandable frustration and the raft of government schemes ). So it all boils down to the monthly payment. As interest rates go down, C$1,000 (or £1,000, or €1,000) will buy you an ever-bigger 25-year loan. In turn, that drives house prices up. It's that simple.
So, just to clarify, yet again: if you are annoyed that house prices have been going up non-stop for most of your adult lifetime, it's all about interest rates. Resolving that is tricky, of course. Because rising interest rates wouldn't just hit house prices, they'd hit the price of every other asset out there. But identifying the problem correctly is a useful start.
As for what happens next – are house prices likely to falter? Maybe. But will they plunge? Only if interest rates go up appreciably. Does that seem likely in the near term? No.
For more on this topic, keep an eye out for Merryn's latest piece on the subject, which should be on the MoneyWeek website tomorrow. And subscribe to MoneyWeek magazine – you can get your first six issues free here.
