The Canadian Housing Market in Layman's Terms - Part 1 - The Basics
"Everything should be made as simple as possible, but not simpler." - Albert Einstein
First, some facts:
- Any market exists because of a supply-demand dynamic.
- Prices rise/fall due to a shift in that dynamic.
- Prices fall if supply is larger than demand. Prices rise if demand is larger than supply.
- External factors such as interest rates, lending rules, etc., only serve to distort and/or favor one side the supply-demand dynamic over the other.
Today's market is a seller's market, which means that demand is higher than supply.
Prices have continued to rise, which implies that demand has consistently stayed higher than supply.
If you want to understand the market dynamic, you have to understand where the supply and demand comes from, and how external factors affect them.
Supply and demand originate from people wanting/needing to buy and sell.
Supply is driven by people who want to sell, whereas demand is driven by people who want to buy.
People sell because they need:
- A bigger/smaller replacement
- Cash
- Both, if your cost of selling is higher than your replacement's cost
People buy because they need:
- A bigger/smaller replacement
- An Investment
- Both, if your cost of buying is higher than your replacement's cost
This applies to people entering the market for the first time, or leaving the market for good.
The supply-demand dynamic in any market can be favored to one side or another by external factors, which make it easier/harder to buy/sell.
These external factors work to:
- Increase supply when they work in favor of sellers/producers, and vice-versa
- Increase demand when they work in favor of buyers/consumers, and vice-versa
These external factors can include:
- Subsidies/tax breaks
- Buying/selling rules
- Lending rules
- Interest rates
These external factors act in unison to favor/distort the market dynamic one way or another.
These external factors are appointed by various governing bodies, which might favor one side of the supply-demand dynamic over another for a multitude of reasons.
These basics are all anyone needs to understand the Canadian housing market.
If you want to learn more about supply and demand, you can check out this short video, which does a phenomenal job of explaining this concept.
If you want a deeper and much more interesting dive into this topic, I highly recommend listening to this podcast. It blew me away the first time I listened to it:
"...I thought for the first time, “what really is a demand curve?” And I thought to really bring it to life, I think I have to find one, I have to show one to the students. And I looked around, and I realized that nobody ever had really actually estimated a demand curve."
