TD says new housing rules may lead to undesirable consequences

TD Economics joined the discussion on ways to cool the hot real estate markets of Canada, saying that policymakers should not introduce any complex measures which don’t aim at the main driver of the home prices growth.

According to TD Senior Vice-President and Chief Economist Beata Caranci, the key reason are historically low interest rates, and Canada shouldn’t act on impulse.

“The sudden and sharp decline in mortgage rates has caused the significant increase in home sales and the on-going strength in demand. The Bank of Canada’s decision did exactly what it was planned to do, although now it may be not so effective”, – she noted.

“Attempt to stop or restrain the demand with the help of numerous complicated rules is not only inefficient, but it also may lead to unintended consequences.”

The BoC has made it clear that it will keep its key lending rate unchanged until at least 2023, trying to increase borrowing activity and support the economic recovery after the pandemic’s hits.

Such a low cost of borrowing has caused a sharp home prices rise. And it’s not only about Toronto and Vancouver, where average home prices rose by 21.6% and 9.4% respectively last month from March 2020. The heat has also spread onto bedroom communities of Canada’s two biggest cities.

Real estate prices in Brampton and Oshawa saw double-digit price increases over the previous year, as home buyers with flexible work possibilities went outside the large city.

As a result, some experts called for alternative ways to cool the markets, including RBC Senior Economist Robert Hogue’s demand to consider a capital gains tax on primary residences.

At the same time, Caranci says with the current real estate market dynamics and the reaction to low lending rates, the interest rate change could be much more effective.

“The fastest path to cooling this market and fighting speculation comes down to the interest rate channel,” – she said.

“Canada had one of the largest downward changes of mortgage rates compared to other countries, and today’s monetary stance may no longer be appropriate for this sector”.

According to Caranci, although a rate change is the most effective way of slowing the prices growth, there are also other measures policymakers could introduce to get a better understanding of activity in the domestic housing market.

“We need to take measures where it’s most necessary. We should start with getting timely, publicly available and accurate data on speculative and investor activity, so that the responses can be aimed at the right segment,” – she noted.

“With this data, the government will be able to take more strategic taxing of investor activity and multiple property owners. As a result, it will help to weaken speculation. However, it’s important to be very careful not to discourage productive investment activity which improves the existing supply and increases rental supply into the secondary market.”