Ever wonder why prices in cities such as Toronto keep going up? The reasons given are many – foreign buyers, low interest rates, lack of supply, and so on – but while these are all contributing factors, the real reason is much simpler.
It’s because there is more money.
The solid line shows the Teranet 6-city index which goes back to 1999, the dashed line is a broad measure of money supply (M2++).
And why is there more money? It’s because house prices have gone up. Most of the money in our economy is generated by bank loans, usually against real estate – and when prices go up, they can make larger loans.
Thus house prices and money supply increase in tandem. Of course, at some point they can also go down in tandem …