The recent acceleration in home prices, which exceed 20% year-over-year in some Canadian markets, is prompting calls for action on the part of policymakers, but any action should wait to see if the market balances somewhat as spring progresses, Scotiabank’s Chief Economist writes in a new report on the housing market.
The report by Jean-François Perrault points to the record-low number of new listings to meet sales demand — historically a good leading indicator of future price growth — as the overwhelming challenge facing Canada’s housing market.
“While the current pace of house price increases is unsustainable, we are hopeful that listings will rise in coming months, COVID-19 lockdowns permitting, and that that will restore a better balance between sales and inventory,” Perrault says. He notes that the arrival of nice weather should bring about an increase in listings to restore some balance and mitigate the need for more aggressive forms of policy intervention.
While not a near-term solution, government should focus primarily on increasing housing inventories, particularly with immigration set to rise dramatically this year and going forward, Perrault writes in the report. Completions have been rising gradually since 2012, while population growth has hit multi-decade highs from 2017 through 2019. He notes that the imbalance between supply and demand is in part due to rules and regulations governing new construction in Canadian provinces and cities.
“We would have been on track for another high had COVID not reduced immigration to the extent it has. Increasing supply is clearly the solution to restoring balance in the housing market, but that is not something that can be achieved overnight,” Perrault says.
- Listen to the latest Pandenomics podcast: Canada's unstoppable housing market here.
Any policy measures introduced should be targeted to speculators, for example. While the federal government has tried to limit house flipping in recent years by reducing the financial incentive, more could be done, the report says. Policy could be implemented whereby gains made on the sale of a residence owned for a set period — say 12 months — be considered as income rather than capital gains. On the other hand, taxing a portion of tax-sheltered gains in the hands of a homeowner selling their principal residence after a period of years would represent a significant financial blow to those looking to get into the market, or homeowners who consider their residence as a retirement nest egg, as Senior Economist Derek Holt details in a report.
However, Perrault writes that measures that limit demand only have so much impact, noting that “foreign buyers represent a small share of homeowners in Canada and taxes on them had, at best, temporary impacts on the housing market.”
Likewise, he says, measures designed to protect households from their own decisions — reducing maximum amortizations, increasing the interest rate at which prospective buyers qualify for mortgages, or tightened mortgage insurance lending standards — by reducing the maximum loan available to buyers has some effect on lowering house prices by decreasing demand, but not enough to right the current imbalance.
The bottom line is, “policymakers should wait to see how listings evolve relative to sales in the next few weeks before taking any action, Perrault concludes.
To read the full Scotiabank Economics report on Canadian housing, click here.
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