What’s the main issue with the Canadian housing market right now?
And so did Robert Hogue with RBC Economics ask the first item in his question-and-answer paper Wednesday (March 24).
Hogue’s answer: “It’s overheating.”
Should policymakers do something about overheating markets?
“Yes, for several reasons,” the RBC economist replied to his own question.
First, overheated property markets “threaten to destabilize the economy down the road if or when a correction occurs, with possible heavy costs for governments”.
“The threat is particularly potent because excessively high price expectations are widespread,” Hogue wrote.
Moreover, he observed that the country hasn’t had a market “overheating of this scope since the late 1980s”.
With low supply of homes for sale and “exceedingly strong” demand, Hogue noted that “property values have soared to levels far outside historical norms”.
“Making matters worse: buyers and sellers expect prices to continue to escalate,” he said.
The second reason for government to intervene, according to Hogue, is that money used to “inflate real estate values isn’t going to more productive purposes in our economy”.
“The misallocation of capital undermines longer-term growth prospects,” he claimed.
According to Hogue, rising prices are also contributing to the growth in demand.
This is because “many buyers opting to act now for fear they’ll miss out”.
Third reason, “Sky-high property values can exacerbate inequality, widening the divide between haves and have-not.”
As a result, “Exorbitant land prices make it more expensive to build more affordable housing.”
Low interest rates are among the factors driving the housing market.
Clearly, Hogue has given up on the Bank of Canada, which indicated last fall that it will keep its rockbottom key rate until 2023.
“It made it very clear long ago that it sees macro prudential measures as the appropriate tools to use,” the economist said about the central bank’s posture amid the COVID-19 pandemic.
Hogue suggested a range of supply- and demand-side measures to cool down the market.
“These include lightening the regulatory burden for new housing approvals to quicken supply response; adjusting municipal zoning to allow more medium-density, family-friendly housing in large urban areas (the so-called ‘missing middle’); growing Canada’s stock of affordable housing significantly; and removing disincentives to build (market) rental apartments—or better yet, tipping the scale in their favour,” Hogue wrote.
He also suggested examining “options to discourage speculative activity as this could generate further volatility”.
“Further tightening of mortgage-lending rules could be necessary if signs of household debt stress emerge,” the RBC economist likewise suggested.
Hogue stated that options include a stricter stress test for borrowers, raising the minimum down payment, and lowering the cap on refinancing.
The RBC economist isn’t sure when everything returns to normal.
Hogue wrote: “One thing is certain: there are no silver bullets.”