As Real Estate Prices Soar, Canadians Debate Government Intervention

Written by Posted On Tuesday, 13 April 2021 00:00

With real estate prices rising by about 25 per cent during the last year, and still on the upswing in many communities, Canadians are divided about whether it’s time for the government to step in to cool down the market.

A study by the Angus Reid Institute found that while 40 per cent of Canadians are hoping that prices keep rising, 39 per cent want them to drop. Not surprisingly, the group hoping for higher prices tend to be older and homeowners, while those looking for a fall are younger and not current owners. But the majority of Canadians, regardless of whether they live in a city, suburb or rural area, do agree that real estate prices are currently “high” or “unreasonably high” in their community.

Canadians also agree on another point, says the study: At least half of residents in every province say their government has done a poor job handling housing affordability.

With a federal budget coming on April 19, there’s been a lot of talk about what measures the government should take to cool the market. “You think housing prices are high now? The longer Ottawa dithers, the worse it will get” was the headline of a recent editorial in the Globe & Mail.

“In the coming months, the economy is going to gain strength, and the number of new immigrants is going to shoot back up,” says the Globe editorial. “That means that, not only are today’s housing-price problems unlikely to fix themselves, they may yet get worse. Ottawa has to act, now.”

A report by Robert Kavcic and Benjamin Reitzes at BMO economics says, “We believe policymakers need to act immediately, in some form, to address the home price situation before the market is left exposed to more severe consequences down the road. As it stands now, prices are going parabolic across a number of markets and the price strength appears to be feeding on itself.”

BMO says, “The action needed today is one that immediately breaks market psychology and the belief that prices will only rise further. That would dampen the speculation and fear-of-missing-out that those expectations are creating.”

Robert Hogue, senior economist at RBC Economics, cites four reasons why action is needed now. He says overheated markets could destabilized the economy when a correction occurs, noting that “Canada has not had a market overheating of this scope since the late 1980s.” He says the capital that is being used up by real estate could be used for “more productive purposes” in the economy and that high prices are “exacerbating inequality, widening the divide between the haves and haves-not.” And finally, exorbitant land prices make it more expensive to build more affordable housing.

But not everyone is pushing for changes immediately.

“Policymakers should wait to see how listings evolve relative to sales in the next few weeks before taking action,” says Jean-François Perrault, SVP and chief economist at Scotiabank. “We are hopeful that listings will rise in coming months, COVID-19 lockdowns permitting, and that will restore a better balance between sales and inventory. If that does not occur, some form of action may be required.”

TD economist Sri Thanabalasingam says the market will likely slow down in the second half of this year as interest rates creep up and homes become more unaffordable. “Barring this, regulators and governments will probably implement additional macroprudential or tax policies to slow down this juggernaut. Either way, we are likely to see a significant cool down over the next two to three quarters.”

If the government decides to act, it’s unlikely to implement a capital gains tax on principal residences, although some people have been calling for that measure. When rumours emerged last summer that Canada Mortgage and Housing Corp. might be looking at such a measure, several real estate industry leaders came out with strong opposition to the idea. 

“Policies focused on demand, such as a capital gains tax on primary residences, can have a short-term impact, but can also be fraught with unintended consequences like further stifling the supply of listings,” says Toronto Regional Real Estate Board CEO John DiMichele. “The federal minister responsible for the housing portfolio has said his government will not entertain such a policy option, which is the right decision.”

Pretty much everyone agrees that the long-term solution to housing affordability is increasing supply.

Perrault says policymakers should be “easing obstacles to new construction for all forms of housing – affordable housing, rentals and owned accommodations. Home prices are likely to trend upward until there is a better balance between the number of homes in Canada and the number of Canadians needing housing.”

Some other suggestions:

“While I certainly don’t favour the introduction of a capital gains tax for typical homeowners, I think it is fair to tax buyers who flip houses over short periods and rely on those profits for their primary source of income,” says David Larock, an independent mortgage broker with Integrated Mortgage Planners. “In such cases, it only seems fair that their regular incomes should be taxed the same as any other income.”

Another suggestion is to eliminate blind bidding in real estate transactions. Across the country, bidding wars for homes have left a lot of frustrated buyers out in the cold. A statement from Canadian Re/Max executives Christopher Alexander and Elton Ash proposes that an industry watchdog be appointed to review transactions where homes are sold well over the asking price. “This would ensure fair listing prices (not well below market value to create bidding wars).” Agents who contravene the rules would be fined.

Re/Max also suggests adding a mandatory condition to every offer, making the purchase conditional on financing. “This would reduce buyer’s remorse and would help to ensure that people can afford what they are buying,” says the statement.

The federal government previously announced that it was working on a one-per-cent tax for properties owned by non-resident foreigners. 

Whatever is in the coming budget, Hogue says the government should “steer clear of taxing transactions (such as a land transfer tax) and other measures including impeding labour mobility or the ability of Canadians to move to a better-suited home. They should also resist providing more help for first-time homebuyers. Without corresponding measures to boost supply, any measures that ultimately heat up demand further – while probably helpful to the first people who take advantage of them – increase the odds of perpetrating problematic price trends and household debt issues.”

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Jim Adair

Jim Adair has been writing about Canadian real estate, home building and renovation issues for more than 40 years. He is the former editor of Canada’s leading trade magazine for real estate professionals, as well as several home building, décor and renovation titles. You can contact him at [email protected]

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