{"id":16523,"date":"2020-09-29T11:11:00","date_gmt":"2020-09-29T18:11:00","guid":{"rendered":"http:\/\/www.roryc.ca\/blog\/?p=16523"},"modified":"2020-09-15T08:59:46","modified_gmt":"2020-09-15T15:59:46","slug":"understanding-pent-up-demand-in-real-estate","status":"publish","type":"post","link":"https:\/\/www.roryc.ca\/blog\/2020\/09\/understanding-pent-up-demand-in-real-estate\/","title":{"rendered":"Understanding Pent-Up Demand in Real Estate"},"content":{"rendered":"<p style=\"text-align: justify;\">\u201cIt\u2019s pent-up demand, bro \u2013 the market\u2019s recovered\u201d is one of the most common things I hear these days. Unfortunately, most people parroting the words don\u2019t actually understand what they\u2019re saying. Pent-up demand means a temporary surge of buying activity, that falls when demand catches up. Temporary being the key word. Under normal circumstances, this occurs as the market begins a rocky recovery. However, central banks deployed unconventional monetary policy at the beginning of this downturn. This has resulted in pent-up demand surfacing in the middle of a pandemic. How this will resolve is even a mystery to central banks.<\/p>\n<p style=\"text-align: justify;\"><strong>Pent-Up Demand<\/strong><\/p>\n<p style=\"text-align: justify;\">Pent-up demand is a brief period of consumption where purchasing is unusually high. This follows a period of unusually low, restrained activity. This can be due to policy influence (a foreign buyer tax, vacancy, etc.), but it\u2019s most closely associated with economic downturns. Basically, people delay purchases until the economy has exited its recessionary phase. Those delayed buyers typically meet with the regular cohort of buyers, and activity appears unusually high. It seems a little odd to casual observers, but it dies down once the delayed buyers are caught up.<\/p>\n<p style=\"text-align: justify;\">That was a little dry and may be hard to visualize, so let\u2019s run through an example. Let\u2019s say a new mortgage stress test is implemented, reducing typical demand by ~30% in the first month, 20% in the second month, and it normalizes at 90% of typical demand the third month. The reduced demand in the first month isn\u2019t permanent \u2013 most of those buyers are only delayed. If half of month one is delayed into month 3, this pent-up demand would create 105% of the typical volume of sales. It may seem like there was no impact, but after the pent-up demand catches up \u2013 you\u2019re left with reduced volumes.<\/p>\n<p style=\"text-align: justify;\"><strong>Why Does This Occur?<\/strong><\/p>\n<p style=\"text-align: justify;\">Why this drop in activity occurs is important to understanding the current market surge. Conventional wisdom suggests people don\u2019t borrow in a downturn because they\u2019re broke. Possibly scared of what\u2019s happening around them. The belief is a consumer driven decision has been made. However, research has shown for decades this isn\u2019t the case. Households aren\u2019t cooling off because they\u2019re worried they\u2019ll be overextended. Households don\u2019t borrow because lenders shut off the taps.<\/p>\n<p style=\"text-align: justify;\">Humans aren\u2019t great at self-regulating their own risks, but free markets are. When risk is high, lenders demand quality borrowers, and charge higher interest rates. This reduces the number of borrowers, but also compensates them for additional risk. By reducing liquidity, only people with solid financials should be able to drive the market. This isn\u2019t just because the system favors wealthy people \u2013 although it does. It\u2019s because people without a cushion or secure employment shouldn\u2019t take out high ratio loans in downturns. Otherwise you end up with non-market activity, like special treatment of mortgage deferrals.<\/p>\n<p style=\"text-align: justify;\">How Central Banks Broke The Market, Without Knowing What\u2019s Next<\/p>\n<p style=\"text-align: justify;\">Now it might make a little more sense why the recession isn\u2019t over, but pent-up demand is appearing. It\u2019s not because lenders aren\u2019t weary of risk. It\u2019s because central banks flooded the market with cheap money, regardless of risk. At the beginning of the pandemic, mortgage rates began to climb and organizations like the CMHC, Canada\u2019s state-owned mortgage insurer, increased qualifying criteria. This is how markets are supposed to work.<\/p>\n<p style=\"text-align: justify;\">However, just a few weeks after the recession kicked off, both Canada and the US flooded the market with cheap mortgage credit. The US Federal Reserve began buying mortgage bonds at 8x the rate seen during the previous buying sprees. The Bank of Canada began buying the Canadian equivalent at a pace of nearly $1 for $4 of mortgage credit expansion. Remember, despite conventional wisdom, people borrow when they can, not when it\u2019s ideal. This cheap attempt at propping up GDP resulted in pent-up demand surfacing in the middle of a recession, instead of at the end of it.<\/p>\n<p style=\"text-align: justify;\">Pent-up demand is a temporary surge of consumer spending, that typically appears at the end of a recession. It usually fades after demand has caught up, and the market\u2019s full risks have become known. This time it surfaced soon after the start of a recession, as central banks enticed borrowers \u2013 regardless of their personal risk. As demand catches up, and future demand is pulled forward, it\u2019s unclear what steps central banks take next. Especially considering they\u2019ve already used tens of billions in firepower, typically reserved for a recovery \u2013 not a downturn.<\/p>\n<p style=\"text-align: justify;\"><a href=\"https:\/\/betterdwelling.com\/understanding-pent-up-demand-in-real-estate-and-how-central-banks-broke-markets\/\" target=\"_blank\" rel=\"noopener noreferrer\">Understanding Pent-Up Demand in Real Estate, And How Central Banks Broke Markets<\/a> by Stephen Punwasi | Better Dwelling<\/p>\n","protected":false},"excerpt":{"rendered":"<p>\u201cIt\u2019s pent-up demand, bro \u2013 the market\u2019s recovered\u201d is one of the most common things I hear these days. Unfortunately, most people parroting the words don\u2019t actually understand what they\u2019re &hellip; [<a href=\"https:\/\/www.roryc.ca\/blog\/2020\/09\/understanding-pent-up-demand-in-real-estate\/\">read more<\/a>]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13],"tags":[],"class_list":["post-16523","post","type-post","status-publish","format-standard","hentry","category-real-estate"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.7 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Understanding Pent-Up Demand in Real Estate &#8226; Rory C Real Estate | Oakwyn Realty<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.roryc.ca\/blog\/2020\/09\/understanding-pent-up-demand-in-real-estate\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"Understanding Pent-Up Demand in Real Estate &#8226; Rory C Real Estate | Oakwyn Realty\" \/>\n<meta name=\"twitter:description\" content=\"\u201cIt\u2019s pent-up demand, bro \u2013 the market\u2019s recovered\u201d is one of the most common things I hear these days. 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