Concerning Canadians are ready for higher rates just to cool down the real estate market

It looks like Canadians are so concerned about the red-hot real estate market that many of them would like the Bank of Canada to raise borrowing costs only to reduce the demand and stabilize home prices.

The recent survey by Nanos Research, conducted for Bloomberg News, shows that almost 70% of Canadians say a significant prices gain has become the main problem for the national economy. Almost half of respondents at least partially support an interest rate increase by the central bank, although it will raise the cost of credit lines, credit cards etc.

Such results show how growing home prices have become a major problem in the public consciousness following a year of a 30% prices increase in certain areas. Many economists at major banks want the government to start acting in order to decrease the market demand. Meanwhile, the Bank of Canada has made it quite clear that it will not raise its key lending rate until the economy copes with excess capacity. The BoC doesn’t expect it to happen sooner than in 2022.

“Although there is no consensus, the very fact that one in two Canadians are open for a rate hike points to a strong desire to cool down a hot real estate market,” – pollster Nik Nanos noted.

As a result, we can see anxiety growing among Canadians, particularly some homeowners whose fortunes are going up with the housing market.

“I have a home, but I also have a son. And I’m wondering how he’s going to survive in this world,” – says Raymond Wong, a Vancouver engineer who filed a petition to Canada’s parliament asking the BoC to consider home prices when determining its interest rate policy. “He can do everything right, but at the end of the day he still won’t be able to afford anything.”

The central bank considers rate increase to be the last method of defense against risks to financial stability. It focuses more on keeping inflation and output growth at healthy levels.

According to most economists, in terms of recovery, it’s still too soon for the Bank to raise the rate. Moreover, it’s unknown whether those respondents who support higher rates took into account the broader consequences of higher borrowing costs.

And yet, Canadians’ growing concern about home prices gains may become a political problem for Prime Minister Justin Trudeau. The government has other ways to slow down the real estate market, e.g. taxes and stricter rules. However, it hasn’t used them as it’s afraid of angry homeowners.

The increasing gap between Canadians with homes and those without has made certain critics point to it as to a battle among classes or generations.

In Canada, home ownership is considered to be vital for a middle class. As a result, Canadians now have to purchase homes for one of the most expensive prices in the world. The home ownership rate in Canada is about 69%, while it’s 65% in France, 63% in the U.K., and 61% in Japan.

According to Trudeau government, it’s particularly focused on helping first-time homebuyers. Nevertheless, most economists don’t believe the measures taken (e.g. a 1% tax for non-resident homeowners and funding for affordable housing) will be able to offset the significant loss faced by prospective homebuyers in 2020.

As an example for alternative policy, the government’s critics point to New Zealand. Having faced a similar market activity boom last year, caused by low interest rates, the country implemented a tax aimed at speculation. In addition to it, the government instructed its central bank to keep in mind the housing sector when determining monetary policy.

Meanwhile, many housing agitators tend to show the problem as a fight between two generations, or between those who have a property and those who don’t. However, the Bloomberg poll, conducted from April 29 to May 3, says it may be not true. Yes, 18% of respondents 18 to 34 support higher rates if it helps to slow down the prices growth, compared to only 13% of respondents over age 55. But the older group was more likely to say they “somewhat support” an increase, than the younger one.

“In my opinion, most people understand that housing in Canada is out of control,” – Benjamin Reitzes from BMO Capital Markets noted. “Although it’s nice to have an asset that is growing in value, it still makes moving to the next property much more expensive. And families with kids now wonder how they will be able to afford housing if the trend goes on”.