BMO economist says there’s a massive attack on Canadian housing prices

Growing mortgage rates, interference at the provincial level, and the uncertainty over what Canada’s finance minister will include into the budget – BMO Capital Markets’ senior economist spoke on various hot topics concerning domestic real estate markets.

“We can see a full-scale attack on Canadian home prices from different levels of policy,” – Robert Kavcic says.

A chronic lack of supply in large cities and their suburbs has attracted particular attention to the affordability issue in Canada. According to the Canadian Real Estate Association (CREA), national supply reached an all-time low in January and last December, pushing the non-seasonally adjusted aggregate home price index up by also record 28% annually in January.

Kavcic mentioned four main factors that could restrain the prices growth, which has pushed affordability out of reach for many first-time homebuyers.

Two of them are new provincial steps announced on Tuesday: the higher and expanded tax on non-resident homebuyers in Ontario (rise from 15% to 20%), and the 2% tax on foreign homebuyers in Nova Scotia.

In addition to it, he pointed to a recent increase in mortgage rates as forecasts for additional rate hikes from the central bank intensify. Several economists, including some at BMO predict a 0.50% rate hike by the Bank of Canada in April, and there are also calls from Citi and BofA for 0.50% increases at each of the next three rate meetings.

The changes at the bond market have already made fixed-rate mortgages more expensive as the yield on five-year Government of Canada bonds almost hit 2.5% last week, while it was only 1.25% at the end of the previous year.

“Five-year fixed rates are already close to 4%, and variable rates may reach the 3% territory by early summer,” – Kavcic believes. “This market was living on almost 1% rates during the entire pandemic. It’s a new story now.”

Moreover, Kavcic says it’s still unclear what Finance Minister Chrystia Freeland will include into the federal budget on April 7.

During the last election campaign, the Liberal Party focused on measures aimed at improving home affordability in Canada. One of the promised changes was a two-year ban on home purchases by foreign buyers, but the details on it haven’t been provided so far. According to a senior Ontario government source, this lack of progress made the province take matters into its own hands by raising its tax on non-resident buyers.

The Prime Minister asked Housing Minister Ahmed Hussen to fulfill the campaign promise on foreign buying activity and other measures including an anti-flipping tax on residential properties.