Canadians worry about the national real estate market, wondering if the government will strike again

According to certain economists and Canada’s largest banks, the national real estate market may face speculative activity, leading to new measures from regulators.

It’s been months already, that we’re seeing extremely low mortgage rates combined with a stronger demand for larger homes and a restrained supply increasing home prices sharply. Lately, there have been signs of speculators pushing the demand, along with other homebuyers afraid to miss a good opportunity.

“With the recent prices gains, it’s possible that some people are speculating,” – noted Benjamin Tal, deputy chief economist at CIBC. “We haven’t seen it at the market until now.”

In case of Toronto, the average price of a property sold last month exceeded the $1 million level for the first time, following a 15% gain during the previous year. In addition to it, increases were reported in most cities including Montreal and Ottawa showing double-digit gains. Combined with weak listings, the stronger demand has left Canada with only 1.9 months of inventory, which is the lowest result on record.

“Growing home prices often lead to increased speculative activity, adding more fuel to already hot markets,” – noted Robert Hogue, an economist at RBC.

This trend brings many points of concern for policy makers: from affordability for young and poor families to worries over a possible correction. However, the officials don’t want to hold back such an important sector when the economy is still trying to rebound from the COVID-19 pandemic.

Last week, the BoC Governor Tiff Macklem said it’s not the right time to introduce stricter rules, although there are certain signs of excessive activity.

“The economy is too weak now, we are trying to come out of the second wave, we need all the growth we can get,” – Macklem said. “In my opinion, we need to watch the situation very closely but I’m not recommending new measures right now.”

Prime Minister Justin Trudeau’s government said three months ago it planned to introduce a foreign buyers tax in 2021. Nevertheless, it also increased the demand supporting first-time home buyers. The last significant rules tightening was made in 2018, and now Trudeau feels a strong pressure to act again at the spring budget.

“It’s important to be on guard for macroprudential measures,” – said Derek Holt, an economist at Bank of Nova Scotia. “Ottawa has been caught off-guard in terms of the real estate sector reacting to very low financing costs.”

We may face a flipper’s tax or changes to mortgage qualification rules, Tal says.

At the same time, the market may cool off naturally as prices become more unsustainable and mortgage rates start growing.

“Moderation is still possible later in 2021,” – Rishi Sondhi, an economist at TD Bank, noted.

“The main thing policy makers should do is to stop saying there’s nothing to worry about when it comes to our real estate market,” – believes John Pasalis, president of Toronto-based Realosophy Realty. “In case Ottawa worries about the sharp prices increase and the market doesn’t cool down naturally, they’ll implement measures to cool it.”

Trudeau’s government is watching the health and stability of the real estate market closely, Jessica Eritou, a spokeswoman for Finance Minister Chrystia Freeland, noted. She didn’t comment on any budget issues.