Amid a scorching real estate market, the head of the Royal Bank of Canada warned that the country needs short-term policy changes to cool the stark supply and demand mismatch.

“I do think we have a supply-demand imbalance that’s causing a very strong, heated marketplace,” RBC chief executive officer Dave McKay said in an interview. “I do believe… that we do need to start invoking some policy change in the short-term.”

Some of these policies McKay pointed to include the B-20 residential mortgage rule that the Office of the Superintendent of Financial Institutions (OSFI) introduced in 2012. Revised in 2016, the current guidelines urge lenders to implement a stress test on prospective borrowers by verifying employment status and income history.

These measures were put in place to ensure that borrowers would be able to pay their mortgage, which McKay applauded.

“The B-20 rules that we implemented a number of years ago were effective in suppressing demand and cooling things in the short-term,” he said. “Therefore, the infrastructure is already there, we can make tweaks to that policy…”

In light of the recent run-up in housing prices, OSFI proposed tougher measures on Thursday. This time, the proposed stress test would set the minimum qualifying rate for uninsured mortgages at the contract rate plus two percentage points, or 5.25 per cent, depending on which rate is higher.

“I am encouraged that that is an implementable short-term policy that does withdraw some borrowers who are stretching themselves too much with low rates and too large a house,” McKay said.

McKay added that another issue in the housing problem is that the supply currently under construction isn’t meeting consumer demand as homebuyers have fled to the suburbs in search of more space.

“There’s a change in preferences, a change in consumer needs that are at-odds a little bit with urban planning,” McKay explained. “We’re trying to densify and go into smaller units vertically whereas what consumers want… is more space, planning for a hybrid world in the future inside cities and more urban, rural areas.”

The recent wave of lockdown measures in COVID-19 hotspot provinces like Ontario will do nothing to pause demand, according to McKay.

“I think it’ll be persistent. I don’t think it’s going away because of a lockdown.”