Bay Street warns about a possible real estate market bubble

The central bank’s Deputy Governor Lawrence Schembri says the growing home prices aren’t going unnoticed. However, he did not specify whether the Bank of Canada plans any action in addition to monitoring closely the risks to the financial system.

“We’re paying attention to the fact that real estate prices have grown relatively sharply in recent months,” – he noted.

“We have to admit that 2020 was quite unusual for the housing market with a period where the market was shut down because of the restrictions, and then a period of reopening with a release of strong demand.”

According to Schembri, a combination of “unusual factors” caused by the pandemic (e.g. Canadians’ need for more space and a reluctance of homeowners to list their properties) is the main basis for the latest price gains that’ve recently caught Bay Street’s attention.

Rosenberg Research Chief Economist and Strategist David Rosenberg expressed the strongest warning saying Canada is facing a “huge bubble” of historic proportions.

Other warnings have followed later from economists at some of the country’s biggest banks.

“Ottawa has been caught off-guard in terms of the real estate sector reacting to very low financing costs, – noted Head of Capital Markets Economics Derek Holt. He also noted that the federal government could try to catch up by introducing certain macroprudential measures in the upcoming budget in order to restrain the prices growth.

Quite a similar opinion was shared by BMO Economist Robert Kavcic on Friday.

“Remember 2016-2017, when we’ve seen mini-bubbles in Toronto, Vancouver, and their suburbs. It has led to new macroprudential measures from both the federal and provincial governments. We may say we’re almost there right now.”

The warnings from some economists has been growing amid the sharp prices increase in certain Canadian real estate markets.

However, while the price growth is leading to bubble speculation on Bay Street, Schembri believes the BoC decided to use a wait-and-see approach.

“In the past, we’ve seen that there are certain fundamental forces that are initially pushing home prices higher and then they start living their own lives. We worry that these price gains may continue at the same rate and cause the speculative activity.”