Hasty attempt to cool real estate market could have 'unintended consequences': TD
VIDEO SIGN OUT
TD Economics is wading into the raging debate over how to cool Canada’s red-hot housing markets, calling on policymakers to avoid implementing any complicated measures that don’t address the key driver of the surge in residential real estate prices.
In a report to clients Thursday, TD Senior Vice-President and Chief Economist Beata Caranci said that ultimately, rock-bottom interest rates are to blame and warned against any knee-jerk policy reaction.
“The sudden and steep drop in mortgage rates was the catalyst behind the jump in home sales and continued strength in demand. The central bank’s policy move did precisely what it was intended to achieve, even though it may now be proving counterproductive. It’s that simple,” she said.
“Trying to now halt or temper demand through a myriad of additional complex rules is not only inefficient, but also risks unintended consequences.”
The Bank of Canada has signaled an intent to keep its policy rate at the effective lower bound until at least 2023 in a bid to boost borrowing activity and support the economic recovery from the ravages of the pandemic.
That low cost of borrowing has led to the significant surge in home prices. The heat has not only been borne out in Toronto and Vancouver, where average home prices were up 21.6 per cent and 9.4 per cent respectively year-over-year in March, but also in bedroom communities of the nation’s two largest cities.
Prices in the likes of Brampton and Oshawa, just outside Toronto, have posted double-digit percentage price gains over the course of the last year, as house-hungry buyers with greater flexibility to work from home went further afield.
That’s led to some calls for policymakers to consider alternative options to cooling the markets, including RBC Senior Economist Robert Hogue’s recommendation for so-called “sacred cows” like a capital gains tax on primary residences to be put on the table.
In contrast, Caranci said that given current housing market dynamics and the response to low lending rates, the interest rate lever would be far more effective than so-called macroprudential tinkering.
“The quickest route to cooling this market and squeezing out speculation comes down to the interest rate channel, and therein lies the solution,” she said.
“Canada had one of the larger downward movements in mortgage rates relative to other countries, and the current monetary stance may no longer be appropriate for this segment of the market.”
Caranci said that while a move on interest rates would be the most effective route to slowing runaway home price increases, there are other measures policymakers could implement to get a better read on activity in the domestic housing market.
“We have to take this bull by the horns and apply solutions where they are most needed. Let’s start by getting timely, publicly available and accurate data on speculative, flipping and investor activity, so that policy responses can be rightsized,” she said.
“With this information, more strategic taxing of investor activity and multiple property owners may help to discourage speculation, but policy initiatives must be careful not to discourage productive investment activity that improves the existing stock and adds rental supply into the secondary market.”