Canada’s federal government is taking a “deep dive” to understand the forces driving home prices to record levels in Toronto and Vancouver. One economist says the answer is obvious: immigration and a lack of desirable single-family detached homes.
“What’s driving home prices? In the long run it’s land scarcity and population growth,” Craig Alexander, VP of economic analysis at the C.D. Howe Institute, told BNN. “Where’s the population growth coming? With an aging baby boom cohort in Canada it’s coming from immigration.”
There is little on the horizon that could de-rail the booming Toronto and Vancouver housing markets, according to Alexander. “Ontario and B.C. have the strongest growth rates in the country, employment is rising, unemployment is declining, personal incomes are increasing, interest rates are incredibly low – this is a recipe for strong real estate markets,” he said.
The one area where policymakers need more information is on the impact of foreign buyers on Canada’s housing sector, said Alexander. “The anecdotal stories are everywhere but you really don’t know how much impact foreign buying is having in these markets until you actually get some numbers.”
Alexander agrees that home prices in Toronto and Vancouver are now overvalued, but that’s largely the result of the Bank of Canada’s record-low interest rates. “If you make debt essentially free you shouldn’t be surprised if you get some overvaluation.”
Ottawa has limited options to try to cool the markets, according to Alexander. Raising interest rates will hit other Canadian real estate markets that are either flat or in contraction and could hurt the overall economy when it’s already struggling with the crash in oil prices.
Meanwhile, the Office of the Superintendent of Financial Institutions is considering new rules that would require Canada’s banks to hold more capital against loans in hot housing markets.
That would make mortgage loans in Toronto and Vancouver more expensive, but won’t be a panacea, said Alexander. “Quite frankly I think the risks are going to continue.”