$248 billion was pumped into Canadian residential in just first three months| Punwasi
Douglas Todd: Is Canada’s central bank afraid of reining in the housing monster?
Douglas Todd
The Vancouver Sun
Opinion: Is it nervous about igniting a recession by tackling a business it considers too big to fail?
“The central bank makes threats. But it does not act,” says SFU Prof. John Richards. Photo by Chris Wattie /REUTERS
Canada’s housing sector has become an out-sized behemoth in the country’s economy — and during the pandemic its power has only grown more distorted, with investors now accounting for one in five Canadian buyers and an even higher percentage in Toronto and Vancouver.
As house prices and inflation continue to soar, Canada’s central bank appears wary of reining in the bloated housing industry with higher interest rates. Is it nervous about igniting a recession by tackling a business it considers too big to fail?
Simon Fraser University public policy professor John Richards believes the Bank of Canada and the federal finance department are “paralyzed” by a fear of setting off this country’s own version of the recession of 2008, which was sparked by U.S. speculators taking out ridiculously risky mortgages.
The Bank of Canada and politicians in Ottawa “could halt the speculative frenzy, raise interest rates, tighten mortgage rules, impose capital gains tax on flips,” Richards said. “However, such policies might cause a recession. Hence, the central bank makes threats. But it does not act.”
No matter how you measure it, the signs are everywhere that the central bank’s overnight lending rate of a meagre 0.25 per cent has contributed to the housing industry expanding out of control in this country, where the economy, profit-taking banks and jobs are more dependent on it than almost anywhere.
“The central bank makes threats. But it does not act,” says SFU Prof. John Richards. Photo by Chris Wattie /REUTERS
Canadian residential real estate was worth $6.1 trillion in 2020. That means the value of Canada’s detached homes and condominium towers is now 300 per cent greater than the country’s Gross Domestic Product, says Canadian housing analyst Stephen Punwasi . In contrast, U.S. housing is worth 170 per cent of its GDP. Punwasi rightfully calls Canada’s situation “mind-blowing.”
With a frenzy of domestic and offshore investors entering Canada’s housing market up to and during COVID-19, Swiss investment bank UBS says Greater Toronto now has the world’s second-most vulnerable housing bubble . Metro Vancouver’s bubble is sixth worst.
Canadians now invest more in homes than businesses. A staggering $248 billion was pumped into Canadian residential real estate in just the first three months of this year, says Punwasi. That was a jump of 42 per cent compared to the same period a year earlier. Eager speculators assume house values will keep rising.
Overall inflation in Canada is now running at 4.7 per cent a year, the highest in almost two decades. Canadian house-price inflation is more exaggerated — in October, values were flying 18 per cent above a year earlier.
A recent Ipsos poll found four of five Canadians say affordability is their top concern. Çanadians are “having difficulty paying for very expensive real estate in our major cities and are also struggling with even starting and raising families, things that people used to take for granted,” says Darrell Bricker, CEO of Ipsos Public Affairs.
Should the housing investment bubble burst, it could be devastating for some investors and parts of the economy, especially in B.C.
This province has only 13 per cent of the country’s population, but Punwasi says it accounts for 24 per cent of the value of the entire country’s housing stock.
Bank of Canada deputy governor Paul Beaudry last week expressed concern about the way investors have flooded into housing. “That can expose the market to a higher chance of a correction,” he said. “And, if one occurs, the damage can spread far beyond the investors.”
But, as Vancouver housing market analyst Steve Saretsky says, the Bank of Canada is not taking responsibility for the way it has encouraged people during the pandemic to pour money into housing by setting extremely low interest rates and, through a process known as quantitative easing, has effectively been printing $5 billion worth of new money each week, to head off a slowdown. The bank has finally said it intends to stop doing so.
Developers and most politicians say the answer to the housing crisis is to build more housing supply. But reflecting on the measures the Bank of Canada and various governments, particularly more-imaginative B.C., have brought in to try to make homes more affordable, Saretsky said this week, “We’ve now tried a foreign buyers tax, empty homes tax, speculation tax, mortgage stress test, record new home completions, and yet house prices continue to push higher. We’ve tried everything but raise the cost of borrowing money. Imagine that.”
It’s not as if nudging up interest rates is a new idea for puncturing excessive exuberance. The Reserve Bank of Australia recently admitted its chronically low rates were a prime factor in driving up the country’s housing prices, since they offer customers big mortgages at low payment schedules.
Even slight interest-rate hikes have made a big difference in Canadian housing. “Remember in 2018, mortgage rates hit 3.5 per cent and everyone thought they were going to four per cent? What happened that year?” Saretsky asks.
“Home sales in Greater Vancouver fell to an 18-year low. And in the Greater Toronto area, home sales fell to their lowest total in a decade. Not surprising that two highly levered housing markets slumped as borrowing costs ramped up.”
With the Bank of Canada now at least hinting it is concerned about housing affordability and inflationary interest rates, there have been recent signs some housing investors might be tempering their mania. Meanwhile, house prices have remained stubbornly out of reach of most city wage earners for a long time.
The economic maneuvering continues, as we wait to see if the Bank of Canada will dare an actual hike.
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