Investor-driven housing mania puts Central Canada’s largest cities at risk of correction: the Bank of Canada

Kevin Carmichael: Montreal may now be the city most at risk of a downturn in the real estate market

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Ground zero of the national housing crisis has shifted to central Canada’s largest cities, and excess demand appears to be coming from investors, not households, according to the Bank of Canada’s biannual review of the financial system.

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Housing mania, which has gripped the country for more than a decade, originated in Vancouver, where the combination of ultra-low interest rates, international money supply and low supply combined to ignite a real estate boom that captured global attention and eventually turned into an economic crisis , which made housing an important political issue.

But demand and supply in British Columbia’s main city center have been fairly balanced since late 2019, according to the Bank of Canada’s House Price Exuberance Indicator, which combines different pieces of housing data to assess whether prices have become “extrapolative”, the central bank words for demand explained with an expectation that prices will continue to rise, not market fundamental factors such as population growth and the number of housing starts.

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Now the authorities in Ontario and Quebec should be most concerned about a housing break-in. The Greater Toronto Area, which admittedly soon overtook Vancouver as a worrying source of house price inflation in the wake of the Great Recession, continues to show signs of “abundance,” as Hamilton and Ottawa do, according to the central bank’s analysis. But Montreal is perhaps now the most at risk of a downturn, as it is squarely on the Bank of Canada’s heat map and went from red during the first half to an even darker red in the third quarter.

Extrapolative price pressure “can occur when people fear losing or expecting to gain future capital gains by reselling or both,” Paul Beaudry, a deputy director of the Bank of Canada, said in a speech November 23 “The good news is that the somewhat slower growth in house prices that we saw over the summer should reduce the chances of unwanted extrapolative price dynamics. But some markets are still showing signs of such expectations. “

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The Bank of Canada’s ability to influence house prices is often overestimated. Higher interest rates would deflate demand, but politicians would rather avoid hurting the prospects of households and businesses to disrupt excessive speculation in individual cities. The central bank has no regulatory powers, so the only thing it can do is use its analytical power to advise politicians and regulators on the situation.

“It’s starting at the municipal level,” Christopher Alexander, president of Re / Max Holdings Inc.’s Canadian unit, told Financial Posts Larysa Harapyn this week with reference to land transfer taxes, the slow approval of building permits and local fights over whether cities are building up or continuing to spread as barriers to accelerating supply. “It is becoming more and more of a crisis. We can not continue to do more of the same, otherwise we will get the same result. “

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In May, when the central bank last reviewed the financial system, it designated for the first time troublesome local markets, a decision that should make it harder for provincial and local politicians to ignore the threat. In the November update, Beaudry added new analysis showing that much of the pandemic’s demand for housing has come from investors and repeat home buyers; Year-on-year growth in mortgage-backed mortgages rose 100 percent in the second quarter, compared with about 60 percent for repeat buyers and about 40 percent for first-time buyers.

“A sudden influx of investors into the housing market has likely contributed to the rapid price increases we saw earlier in the year,” Beaudry said. In such a case, expectations of future price increases can become self-fulfilling, at least for a period of time. It could expose the market to a greater chance of correction. “

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Housing was specifically mentioned in Prime Minister Justin Trudeau’s trontale on 23 November and highlights the extent to which property prices have become a political issue. The government quoted its campaign promise to create a $ 4 billion fund to fund 100,000 new urban housing by 2025 and a separate pledge to create a new rent-to-own program as examples of its commitment to lower the cost of shelter.

It also said it would follow up on a promise to renew it Incentive for first-time home buyers , a demand site that has Canada Mortgage and Housing Corp., which helps with an initial payment in return for a shareholding in the property. The program adds fuel to the fire by stimulating demand, albeit marginally, but it at least prevents stretched households from taking on more debt. This is important because the debt that Canadians have accumulated in search of rising housing costs remains a weak point that remains of concern to the central bank, especially as it is ready to resume interest rate hikes from ultra-low levels.

“Vulnerabilities associated with high debt generally appear to rise again after a short break,” Beaudry said. “While Canadian banks are resilient, these vulnerabilities could exacerbate the economic impact of any significant rate hike or negative shock.”

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