RBC says Canada needs to cool down the real estate market

According to Robert Hogue, an economist at RBC, the national real estate market is overheating, so it’s necessary to take measures on cooling it.

“We can see an extremely strong demand combined with a restrained supply, which leads to home prices exceeding the historical norms,” – he says. “In addition to it, buyers and sellers expect prices to keep growing.”

Hogue has joined the army of those who believe a red-hot housing market, which has led real estate prices to record levels, is getting out of control. Although policy makers say the combination of low rates and high demand for larger properties caused by the pandemic are driving the market, they also note they’re watching closely for signs of growing speculation.

Hogue believes acting now may help avoid the possibility of a painful correction (decline) in the future and prevent the gap between rich and poor from further increases.

As the central bank will probably keep its key lending rate low in order to support the national economy, Hogue says the responsibility to control the real estate market may fall to local officials at the municipal and provincial levels. They are the ones who have the most power to raise the housing supply through permitting and zoning processes.

In his opinion, the federal government needs to review the supports it provides to homeownership, from national mortgage rules to tax incentives for investors in residential housing. Hogue also believes Canada needs to end the tax exempt status of capital gains on a homeowner’s principal residence.

“This support was designed during the times when interest rates were much higher, so it could offset their influence,” – he noted. “As the Bank of Canada plans to keep the rates low for a longer period of time, this support should be reviewed”.