Canadian home prices soar, raising odds of a government policy response

More Calls for Policymakers to Intervene in Housing “Frenzy”

Economists from BMO have added their voices to those calling on policy-makers to take action to prevent a potential housing bubble due to prices going “parabolic.”

“We believe policymakers need to act immediately, in some form, to address the home price situation before the market is left exposed to more severe consequences down the road,” BMO economists Robert Kavcic and Benjamin Reitzes wrote in a report entitled Canadian Housing Fire Needs a Response.

“The action needed today is one that immediately breaks market psychology and the belief that prices will only rise further,” they continued. “That would dampen the speculation and fear-of-missing-out that those expectations are creating.”

They noted demographic and supply factors have been underlying contributors to the current situation for some time, but that “fuel has been poured on the fire” as a result of record-low interest rates and the Bank of Canada setting expectations that rates will remain low for up to two more years.

The Globe & Mail also ran an editorial echoing concerns about the pace of recent home price gains.

“When the last housing wildfire hit, in 2016-17, governments poured water on it,” the Globe noted. ” They brought in new taxes on foreign buyers, speculation and empty homes, and new stress-test rules that made it tougher to qualify for a mortgage.”

But with such high housing demand while immigration levels are temporarily low, they argue “the dangers look worse than four years ago.”

TD Bank also weighed in on the situation recently in its Quarterly Economic Forecast report.

“If the housing market fails to moderate and/or signs of a speculative-driven bubble further mount in the coming months, policymakers could be pressed into action to cool housing activity, not unlike the macroprudential and tax measures undertaken in 2016 and 2017,” the report reads. “This appears to be more of risk for later this year or in 2022, given the importance of housing in supporting the economic recovery.”

These latest calls for a policy response to runaway home prices follow a similar report released last week by RBC Economics.

We reached out for comment from the Canada Mortgage and Housing Corporation (CMHC), which has advocated strongly for stricter mortgage rules in the past, including the stress test on insured mortgages in October 2016 and on uninsured mortgages in January 2018.

“High household indebtedness continues to be a concern and the COVID-19 pandemic has exposed long-standing vulnerabilities in our financial markets,” a CMHC spokesperson told CMT. “CMHC continues to monitor all risks and adjusts its underwriting accordingly; no changes are underway at this time.”

While CMHC isn’t responsible for implementing new mortgage or housing policies, it does advise the Department of Finance on such matters. “CMHC supports actions that reinforce the Canadian housing finance system and that protects the financial security of Canadians,” the spokesperson added.

Policy Options That Are on the Table

One of the key policy options that’s been floated around in recent weeks is a blanket capital gains tax on the sale of principal residences.

In their report, BMO’s economists proposed a number of possible policy options, one being a more targeted capital gains tax: “A special capital gains tax on the sale of residential real estate purchased from today forward, with the rate falling to zero over five years of holding the asset.”

On non-principal residences, they suggest the maximum capital gains tax become the current rate, which would be about 26% in Ontario, in addition to the province’s Non-Resident Speculation Tax (15%).

“This could easily crowd out speculation and alter market psychology,” they wrote. “A similar concept was used in Ontario in the 1970s, and it weakened the market overnight.”

A few more of the many policy options available include:

  • Rate hikes by the Bank of Canada, “or at least back off from its commitment to hold policy rates at near-zero until 2023.”
  • Further tightening mortgage standards, including re-evaluating the current stress tests or reducing the maximum gross and total debt service ratio limits
    • “The current qualification rate is already well above market rate and past rule changes have already insulated the financial system from systemic/interest rate risk,” the BMO economists wrote. “This may not change buying behaviour, only the qualifying amount. Past changes have had modest/temporary impact at most.”
  • Limit equity take-out through refinancing to 65% instead of 80%
  • Reforming the offer system to eliminate blind bidding in real estate transactions
  • Encouraging the development of single-detached housing supply to help meet demand
  • Implement a national non-resident tax similar to those in effect in B.C. and Ontario
Canadian home prices soar, raising odds of a government policy response
  1. If we limited the number or increased the tax rate on second homes like the USA or increased the time you needed to own to 10 years like New Zealand to qualify for no capital gains, it would be more targeted than blanket policy that impacts first time home owners equally.

  2. policy-makers to intervene? come one, the house madness is caused by the policy-makers – printing money non-stop.. you think money printing can kill the virus?

  3. The house prices are rediculous We have been trying to save to buy a house and every time I turn around it gets further and further away.What happened to our country thst a hard working family could be on the street ,we are renting and now our landlord has filed for a rezoning of his property to subdivide and thst leaves us out as the house will be torn down,Ihave been looking for another rental but there is little available to us and the one that I have found the rent is 3000 dollars as we need to stay in the area and also need a house not an apartment we can pay 3000 dollars to pay off someone else’s mortgage but the banks won’t give us our own what is wrong with that.We have rented at rent of 2500 for the last 16 years never missed a payment but yet the bank won’t take a chance on us I guess there ate 2 things to have either be rich either with money or equity or know someone to fudge the application ,which we have neither It is really scary if you fall in this situation Please help the little person this is to all the banks and goverment,the first time buyers incentive is not enough they need to do more for us.

  4. Canada is not unique in this. Many countries are seeing exceptionally strong sales accompanied by extreme price growth. I’d be very interested in seeing commentary on what other governments/central banks are saying and their policy responses.

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