Canada’s home affordability crisis stems from two major factors:
- Restricted supply
- Growing effective demand
However, what’s often overlooked is the crucial role that money supply plays in driving effective demand.
📈 The Correlation: Over the last 45 years, home prices in Canada have shown a near-perfect correlation with M1, the most accessible form of money supply. This highlights how an increase in money supply fuels demand for housing.
🏠Supply Side: Supply constraints are mainly influenced by:
- Zoning restrictions
- Taxes and fees imposed by local governments
💵 Demand Side: The growing effective demand has two key contributors:
- Population growth
- Expansion of money supply
But the most influential factor driving up the effective demand is the increase in money supply, which creates speculative demand for houses. For example, when central banks inject liquidity by buying government bonds, it inflates asset prices—everything from real estate to equities—much higher than the rate of CPI growth.
🔑 As was said in an earlier post, in terms of gold, the price of an average home in Canada is now equivalent to its 1988 level (7 kilos)! What’s truly diminishing is the purchasing power of wages due to inflation in asset classes.
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