There are 25 residential markets tracked monthly by the Canadian Real Estate Association and if you scan all of them, you might ask yourself just what is this real estate crisis that people are talking about?
Nationally, the average sale price of a home during the first two months of 2017 was at an all-time high of $499,721, but prices only increased 2.2 per cent from the same period a year ago. That’s barely above the inflation rate.
Dig into the numbers further and you’ll find that seven of those 25 markets are now witnessing pricing declines, including the once red-hot Greater Vancouver area, where the average price of a home has dropped 13.3 per cent to $950,185.
In Alberta, there is no call to slow down the market. Even though Calgary prices climbed 2.6 per cent, the city is still grappling with double-digit sales declines.
The crisis, as some call it, is centered in the Greater Toronto Area and increasingly what is known as the Greater Golden Horseshoe (GGH), which has a population of 9.2 million contained within an area bounded by Lake Ontario to the west, Lake Erie to the south and Georgian Bay to the north.
The Toronto Real Estate Board on Wednesday said prices climbed 33 per cent across the GTA in March from a year earlier to an average of $916,567 and the city seems poised to climb past Vancouver as the most expensive housing market.
“It has been encouraging to see that policymakers have not implemented any knee-jerk policies regarding the GTA housing market,” board president Larry Cerqua said.
But Canada Mortgage and Housing Corp. has expressed concerns about the Toronto housing market, specifically pointing to the contagion effect spilling into neighbouring communities.
In Hamilton-Burlington, prices were up 22.6 per cent during the first two months of 2017 compared to a year earlier while Kitchener-Waterloo had a 23.5-per-cent increase — both a product of people fleeing neighbouring Toronto looking for cheaper housing.
The critical issue for policymakers, both federally and provincially, is how to cool the GTA and the surrounding GGH without damaging the more delicate parts of the country where housing markets are in recovery mode.
Guy Huntington, chief executive of the Calgary Building Industry and Land Development Association, said his group has shared concerns about further lending restrictions.
“Your need to cool the market in Toronto and Vancouver is actually having a greater negative effect on the state of the country,” he said.
Nevertheless, pressure is building on some provincial and municipal governments to intervene, something British Columbia did when it imposed a 15-per-cent foreign buyer tax on Vancouver in 2016.
In Ontario, the debate is now at Queen’s Park, where the opposition NDP is also calling for tougher rent controls. Rental rates for the average purpose-built apartment jumped 11.6 per cent in 2016 to $2.77 per square foot, and larger increases are being reported in 2017.
“I think the solutions might be provincial and city specific now,” said Andrew Charles, chief executive of Canada Guaranty Mortgage Insurance Co., the country’s second-largest private mortgage default insurance company.
What can governments do to slow down Toronto’s housing market without laying waste to the rest of the markets across the country? Here are seven ideas making the rounds.
Rent control
Rent control is arguably the most controversial idea out there. Few economists think it will work, developers are already threatening to cancel future projects and existing landlords have started jacking up rents in case they can’t in the future.
“The issue is a lot of investors have pumped a lot of money into rental property with the idea that they can raise rents,” said Paul Finkbeiner, president of GWL Realty Advisors Inc. “They’ve also upgraded them in the same vein. If they put in rent controls, it would likely cause that to slow or pause.”
Don Campbell, a senior analyst at the Real Estate Investor Network and author, offers a novel approach that uses the Canada Pension Plan Investment Board, which is always on the lookout for assets that will deliver long-term income.
“We get them building rental properties,” he said. “They get the yield and everybody wins.”
More mortgage regulationsThe latest round of tougher mortgage regulations last October required that consumers with loans backed by the federal government have to qualify using the posted five-year fixed rate of 4.64 per cent — almost 200 basis points higher than market rates. That resulted is larger mortgage payments and smaller loans.
Critics also complain that restricting mortgage insurance to homes that cost less than $1 million does little to cool markets such as Toronto, where the average detached home sold for $1.56 million in March.
“The last set of changes were the most impactful since they started,” said Phil Soper, chief executive of Royal LePage Real Estate Services Ltd., noting reports that 20 per cent of first-time buyers are now out of the market.
“When you take first-time buyers out of play, there are less move-up buyers, and when there’s less move-up buyers, there are less luxury buyers,” he added. “The problem is it takes some time to work and we have governments in Ontario and British Columbia that don’t have time because they have elections.”
Another plan bandied about is for Ottawa, through the Office of the Superintendent of Financial Institutions, to place tighter restrictions on low-ratio mortgages, those with more than 20-per-cent equity that are not required to have insurance.
“It’s time to get away from restrictions on just the insured market,” said one executive, who asked not to be named. “OSFI could easily force banks loaning money to people with low-ratio mortgages to also qualify based on the posted rate, effectively restricting access to debt.”
Foreign buyer taxProponents say the foreign buyer tax in Greater Vancouver has reduced the massive price gains and slowed sales there, but there are now anecdotal reports that overseas buyers have switched their focus to Victoria, which doesn’t have such a tax.
A similar tax in the GTA could just result in a swelling of buyers in cities near the regional border such as Guelph.
Another problem seems to be mixing up foreign buyers with immigrants looking to settle here who might be getting some of their capital from abroad.
“We have provinces like British Columbia and Ontario that are saying bring us your tech jobs,” Campbell said. “We’re telling people to come here, but don’t be buying any of our houses. It’s a mixed message.”
New immigrants are one driver of the housing market, so plans by the federal Liberals to increase immigration will only create even more demand for housing.
A study from Altus Group Ltd. found half of the new home market in Toronto could be traced to immigrants.
Speculation taxOntario brought in a speculation tax in April 1974 and realtors maintain it crashed the market overnight, although former Premier Bill Davis told the Financial Post it worked just fine. The tax was repealed in 1978.
“The devil is really in the details of how you design it,” said Craig Alexander, chief economist at the Conference Board of Canada. “Are we trying to stop people from flipping properties after three to six months or is two years still a speculation purchase?”
He said you could discourage foreign buyers, who are often thought to be speculators, by imposing a tax that is ultimately deductible off any taxes they pay in Canada.
“When a foreign buyer purchases a house, they’d have to pay the tax when they purchase, but then when they file their income taxes, they would make the tax they paid deductible,” he said.
Mortgage deductible for banksCMHC’s chief executive Evan Siddall has indicated he supports looking into the idea of forcing financial institutions to have more “skin in the game” when it comes to loans that default.
The banks would be forced to pay a deductible on all insured loans — much like consumers do with home insurance — that ended up in default, which would lead to increased costs that would then be passed on to consumers.
“Implementing that policy would raise the cost of capital and that would raise rates,” Alexander said. “The markets with highest risk would be the markets with the most inflated prices.”
Allow more supplyThe development industry has long championed looser restrictions on development as a way to improve housing affordability.
“If we want young buyers and growing families to have a better shot at home ownership, we need the provincial government to work in partnership with cities to clear aside hurdles to increasing the number of homes in the market and the choices in the marketplace,” said Tim Hudak, chief executive of Ontario Real Estate Association, after the latest GTA housing results.
Benjamin Tal, deputy chief economist at CIBC World Markets, said Ontario could immediately impact supply by signalling that it will not proceed with plans to further restrict low-density development in favour of high-rise development.
He said some developers have been banking land or speculating as prices continue to rise in the Toronto region.
“Sending a clear signal would release some land (developers are holding),” Tal said.
Others question whether changing rules about density and the green belt around Toronto would be fair at this point.
“Creating more access to the Green Belt to boost supply, raises moral issues,” said Finn Poschmann, chief executive of the Atlantic Provinces Economic Council. “Ontario and Toronto voters voted for the Green Belt, and people bought houses because they chose to be near it. There would be a nasty sense of reneging.”
Poschmann said a better idea would be to encourage more supply of a range of rental housing types by changing zoning rules to allow for increased density and ensuring that the property tax system becomes less discriminatory toward multi-unit rentals.
“Zoning and property tax reform are best long-term routes to building supply and keeping the market liquid and flexible,” he said.
Raising the overnight lending rate just to cool one house market is not something the Bank of Canada is likely to do, but economist Alexander said higher rates might be the single biggest thing that can be done to cool down the market.
“We are starting to see stronger economic growth and, if anything, economic data is coming in better than anticipated,” he said. “A strong case can be made that although financial markets aren’t expecting rates to be raised until 2018, you can make a case that Bank of Canada can take rates up to the one-per-cent mark.”
Floating or variable rates tend to track the overnight rate and the banks would likely pass any increased cost on to their customers. The small increase would most impact consumers living where housing prices are the highest as well as those who are the most stretched in terms of debt.
Through OSFI, Ottawa could also increase the capital requirements of banks, which is effectively like increasing long-term rates because financial institutions will pass on their additional costs to consumers through more expensive mortgages and loans.
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