Bank of Canada highlights points of concern for real estate market

The central bank sees worrying signals that certain Canadians are taking on too much debt in order to enter Canada’s red-hot real estate market and purchase a property.

According to the Bank of Canada Governor Tiff Macklem, there are signs that loan levels relative to home values are going up. It means some borrowers may take on more debt than they can actually afford. In addition to it, he noted that people started buying homes based on their expectations of a further prices growth.

“Canadians are taking on more debts and it’s worrying”, – Macklem said. “In case Canadians are making their decisions based on the belief that the recent price increases will go on indefinitely, it’s a huge mistake, because it’s impossible.”

Meanwhile, Macklem noted the BoC can’t do much about that as it needs to keep interest rates low to provide a support for the economic recovery.

His statement appeared amid strong calls from economists to cool the housing market. Last week, the BMO’s Robert Kavcic and RBC’s Robert Hogue released reports  warning that it’s important to take measures on breaking the psychology of expecting continued gains in housing. The main concern is sharp prices increase which could destabilize the market.

Certain measures are suggested, for instance, taxes aimed at speculators (New Zealand has already introduced it), or closing the popular tax exemption for capital gains on primary residences (the government has already declined it – mortgagelegko’s note). Another option is the elimination of blind bidding wars for properties which may push prices even higher.

Both experts pointed also to lack of housing supply as the main driver of the latest prices gains.

Justin Trudeau’s government plans to implement a tax on foreign non-resident homeowners. According to Finance Minister Chrystia Freeland, she is watching the market closely. However, she didn’t specify the reason of this particular attention.

Last week, Canada Mortgage and Housing Corp. (CMHC) added three more cities to its list of markets extremely vulnerable to a significant prices decline, including Toronto. CMHC says the recent price growth across Canada means overheating risks are a national problem already.