What\u2019s the main issue with the Canadian housing market right now? <\/b><\/font><\/h4>\nA: <\/font><\/b>It\u2019s overheating. Demand is exceedingly strong, inventories are generally low, and property values have soared to levels far outside historical norms. Making matters worse: buyers and sellers expect prices to continue to escalate. Until recently, Canadian housing-market worries mostly reflected conditions in Toronto and Vancouver. Now, it\u2019s a national concern. In fact, prices are rising fastest in smaller markets like Mission BC, Tillsonburg ON, Sainte-Ad\u00e8le QC and Moncton NB. These factors have pumped up mortgage borrowing\u2014which is rising at the strongest rate in nearly a decade (7.2% y\/y in January)\u2014and the size of new mortgages. These conditions will only add to Canadian households\u2019 heavy debt load. <\/p>\nQ: Why is Canadian housing demand so strong? <\/b><\/font><\/h4>\nA: <\/font><\/b>Large population in-migration and solid labour markets had housing demand running hotter than supply in many parts of Canada before the pandemic. The pandemic cranked up the heat. The drop in interest rates to rock-bottom levels, changing housing needs and surging household savings have all stoked demand. Surging prices are also pulling demand forward, with many buyers opting to act now for fear they\u2019ll miss out. The factors driving the current frenzy will eventually reverse or run their course. As we bring COVID under control, interest rates will gradually increase; housing needs will change more slowly; and household savings will return to normal levels. However, it\u2019s difficult to know when that will be. <\/p>\nQ: Should policymakers do something about overheating markets? <\/b><\/font><\/h4>\nA: <\/font><\/b>Yes, for several reasons. 1) Overheated markets threaten to destabilize the economy down the road if or when a correction occurs, with possible heavy costs for governments. The threat is particularly potent because excessively high price expectations are widespread. Canada hasn\u2019t had a market overheating of this scope since the late 1980s. 2) Capital used to inflate real estate values isn\u2019t going to more productive purposes in our economy. The misallocation of capital undermines longer-term growth prospects. 3) Sky-high property values can exacerbate inequality, widening the divide between haves and have-not. Exorbitant land prices make it more expensive to build more affordable housing. <\/p>\n This isn\u2019t to suggest there are glaring policy holes to fill in Canada. Canadian policymakers implemented several rounds of rule tightening after the global financial crisis in an effort to calm activity in the priciest markets. These measures strengthened the resilience of Canadian households and the financial sector, and limited the federal government\u2019s exposure to any housing market downturn. <\/p>\n
Lastly, don\u2019t look for the Bank of Canada to alter its policy course to address housing-market issues. It made it very clear long ago that it sees macro prudential measures as the appropriate tools to use. <\/p>\n
Q: What are some options to address lack of supply and strong demand? <\/b><\/font><\/h4>\nA: <\/font><\/b>First off, policymakers should re-double efforts to address supply issues that existed before the pandemic. These include lightening the regulatory burden for new housing approvals to quicken supply response; adjusting municipal zoning to allow more medium-density, family-friendly housing in large urban areas (the so-called \u2018missing middle\u2019); growing Canada\u2019s stock of affordable housing significantly; and removing disincentives to build (market) rental apartments\u2014or better yet, tipping the scale in their favour. The need for more affordable rental options for ordinary Canadians is greater than ever. Most of the supply-side measures we\u2019ve outlined here fall into local authorities\u2019 lap, although higher levels of government have a role to play. However, they aren\u2019t quick fixes. <\/p>\n Further tightening of mortgage-lending rules could be necessary if signs of household debt stress emerge. Historic government aid and financial institutions\u2019 debt payment deferral programs have distorted the household debt picture since the pandemic\u2014debt ratios, and delinquency and bankruptcy trends look surprisingly benign. There could be issues brewing beneath the surface, however. Policy options include a stricter stress test, raising the minimum down payment and lowering the cap on refinancing. <\/p>\n
Policymakers should look at a range of options to discourage speculative activity as this could generate further volatility. We find New Zealand\u2019s just-announced phasing-out of mortgage interest expense tax-deductibility for investors an interesting proposal. <\/p>\n
Over the longer term policymakers should undertake a more holistic review of housing policy to ensure it is not contributing to any distortions in the market. The housing policy mix should be revisited to reflect a changing economic environment, evolving demographics trends and a lower for longer interest rate backdrop. Given wide-reaching implications, a thorough, comprehensive examination of all related aspects would be necessary. One of the more significant proposals would be to revisit the principal residence exemption from capital gains tax. With many Canadians having built their wealth (and retirement plans) on realizing the full value of their home, any amendments would have to carefully balance the impact on the housing market and the financial security of Canadians, and apply only on a go-forward basis. Always complex, such a proposal may prove more of a theoretical exercise than a politically viable one. <\/p>\n
One thing is certain: there are no silver bullets. All demand-side options have side-effects and work, at best, for a limited time. <\/p>\n
Q: In the context of the current housing market, what should policymakers not do? <\/b><\/font><\/h4>\nA: <\/font><\/b>They should steer clear of taxing transactions (e.g. land transfer tax) and other measures impeding labour mobility or the ability of Canadians to move to a better-suited home. They should also resist providing more help for first-time homebuyers. Without corresponding measures to boost supply, any measures that ultimately heat up demand further\u2014while probably helpful to the first people who take advantage of them\u2014increase the odds of perpetuating problematic price trends and household debt issues. <\/p>\n
Q: Why is Canadian housing demand so strong? <\/b><\/font><\/h4>\nA: <\/font><\/b>Large population in-migration and solid labour markets had housing demand running hotter than supply in many parts of Canada before the pandemic. The pandemic cranked up the heat. The drop in interest rates to rock-bottom levels, changing housing needs and surging household savings have all stoked demand. Surging prices are also pulling demand forward, with many buyers opting to act now for fear they\u2019ll miss out. The factors driving the current frenzy will eventually reverse or run their course. As we bring COVID under control, interest rates will gradually increase; housing needs will change more slowly; and household savings will return to normal levels. However, it\u2019s difficult to know when that will be. <\/p>\nQ: Should policymakers do something about overheating markets? <\/b><\/font><\/h4>\nA: <\/font><\/b>Yes, for several reasons. 1) Overheated markets threaten to destabilize the economy down the road if or when a correction occurs, with possible heavy costs for governments. The threat is particularly potent because excessively high price expectations are widespread. Canada hasn\u2019t had a market overheating of this scope since the late 1980s. 2) Capital used to inflate real estate values isn\u2019t going to more productive purposes in our economy. The misallocation of capital undermines longer-term growth prospects. 3) Sky-high property values can exacerbate inequality, widening the divide between haves and have-not. Exorbitant land prices make it more expensive to build more affordable housing. <\/p>\n This isn\u2019t to suggest there are glaring policy holes to fill in Canada. Canadian policymakers implemented several rounds of rule tightening after the global financial crisis in an effort to calm activity in the priciest markets. These measures strengthened the resilience of Canadian households and the financial sector, and limited the federal government\u2019s exposure to any housing market downturn. <\/p>\n
Lastly, don\u2019t look for the Bank of Canada to alter its policy course to address housing-market issues. It made it very clear long ago that it sees macro prudential measures as the appropriate tools to use. <\/p>\n
Q: What are some options to address lack of supply and strong demand? <\/b><\/font><\/h4>\nA: <\/font><\/b>First off, policymakers should re-double efforts to address supply issues that existed before the pandemic. These include lightening the regulatory burden for new housing approvals to quicken supply response; adjusting municipal zoning to allow more medium-density, family-friendly housing in large urban areas (the so-called \u2018missing middle\u2019); growing Canada\u2019s stock of affordable housing significantly; and removing disincentives to build (market) rental apartments\u2014or better yet, tipping the scale in their favour. The need for more affordable rental options for ordinary Canadians is greater than ever. Most of the supply-side measures we\u2019ve outlined here fall into local authorities\u2019 lap, although higher levels of government have a role to play. However, they aren\u2019t quick fixes. <\/p>\n Further tightening of mortgage-lending rules could be necessary if signs of household debt stress emerge. Historic government aid and financial institutions\u2019 debt payment deferral programs have distorted the household debt picture since the pandemic\u2014debt ratios, and delinquency and bankruptcy trends look surprisingly benign. There could be issues brewing beneath the surface, however. Policy options include a stricter stress test, raising the minimum down payment and lowering the cap on refinancing. <\/p>\n
Policymakers should look at a range of options to discourage speculative activity as this could generate further volatility. We find New Zealand\u2019s just-announced phasing-out of mortgage interest expense tax-deductibility for investors an interesting proposal. <\/p>\n
Over the longer term policymakers should undertake a more holistic review of housing policy to ensure it is not contributing to any distortions in the market. The housing policy mix should be revisited to reflect a changing economic environment, evolving demographics trends and a lower for longer interest rate backdrop. Given wide-reaching implications, a thorough, comprehensive examination of all related aspects would be necessary. One of the more significant proposals would be to revisit the principal residence exemption from capital gains tax. With many Canadians having built their wealth (and retirement plans) on realizing the full value of their home, any amendments would have to carefully balance the impact on the housing market and the financial security of Canadians, and apply only on a go-forward basis. Always complex, such a proposal may prove more of a theoretical exercise than a politically viable one. <\/p>\n
One thing is certain: there are no silver bullets. All demand-side options have side-effects and work, at best, for a limited time. <\/p>\n
Q: In the context of the current housing market, what should policymakers not do? <\/b><\/font><\/h4>\nA: <\/font><\/b>They should steer clear of taxing transactions (e.g. land transfer tax) and other measures impeding labour mobility or the ability of Canadians to move to a better-suited home. They should also resist providing more help for first-time homebuyers. Without corresponding measures to boost supply, any measures that ultimately heat up demand further\u2014while probably helpful to the first people who take advantage of them\u2014increase the odds of perpetuating problematic price trends and household debt issues. <\/p>\n
Q: Should policymakers do something about overheating markets? <\/b><\/font><\/h4>\nA: <\/font><\/b>Yes, for several reasons. 1) Overheated markets threaten to destabilize the economy down the road if or when a correction occurs, with possible heavy costs for governments. The threat is particularly potent because excessively high price expectations are widespread. Canada hasn\u2019t had a market overheating of this scope since the late 1980s. 2) Capital used to inflate real estate values isn\u2019t going to more productive purposes in our economy. The misallocation of capital undermines longer-term growth prospects. 3) Sky-high property values can exacerbate inequality, widening the divide between haves and have-not. Exorbitant land prices make it more expensive to build more affordable housing. <\/p>\n This isn\u2019t to suggest there are glaring policy holes to fill in Canada. Canadian policymakers implemented several rounds of rule tightening after the global financial crisis in an effort to calm activity in the priciest markets. These measures strengthened the resilience of Canadian households and the financial sector, and limited the federal government\u2019s exposure to any housing market downturn. <\/p>\n
Lastly, don\u2019t look for the Bank of Canada to alter its policy course to address housing-market issues. It made it very clear long ago that it sees macro prudential measures as the appropriate tools to use. <\/p>\n
Q: What are some options to address lack of supply and strong demand? <\/b><\/font><\/h4>\nA: <\/font><\/b>First off, policymakers should re-double efforts to address supply issues that existed before the pandemic. These include lightening the regulatory burden for new housing approvals to quicken supply response; adjusting municipal zoning to allow more medium-density, family-friendly housing in large urban areas (the so-called \u2018missing middle\u2019); growing Canada\u2019s stock of affordable housing significantly; and removing disincentives to build (market) rental apartments\u2014or better yet, tipping the scale in their favour. The need for more affordable rental options for ordinary Canadians is greater than ever. Most of the supply-side measures we\u2019ve outlined here fall into local authorities\u2019 lap, although higher levels of government have a role to play. However, they aren\u2019t quick fixes. <\/p>\n Further tightening of mortgage-lending rules could be necessary if signs of household debt stress emerge. Historic government aid and financial institutions\u2019 debt payment deferral programs have distorted the household debt picture since the pandemic\u2014debt ratios, and delinquency and bankruptcy trends look surprisingly benign. There could be issues brewing beneath the surface, however. Policy options include a stricter stress test, raising the minimum down payment and lowering the cap on refinancing. <\/p>\n
Policymakers should look at a range of options to discourage speculative activity as this could generate further volatility. We find New Zealand\u2019s just-announced phasing-out of mortgage interest expense tax-deductibility for investors an interesting proposal. <\/p>\n
Over the longer term policymakers should undertake a more holistic review of housing policy to ensure it is not contributing to any distortions in the market. The housing policy mix should be revisited to reflect a changing economic environment, evolving demographics trends and a lower for longer interest rate backdrop. Given wide-reaching implications, a thorough, comprehensive examination of all related aspects would be necessary. One of the more significant proposals would be to revisit the principal residence exemption from capital gains tax. With many Canadians having built their wealth (and retirement plans) on realizing the full value of their home, any amendments would have to carefully balance the impact on the housing market and the financial security of Canadians, and apply only on a go-forward basis. Always complex, such a proposal may prove more of a theoretical exercise than a politically viable one. <\/p>\n
One thing is certain: there are no silver bullets. All demand-side options have side-effects and work, at best, for a limited time. <\/p>\n
Q: In the context of the current housing market, what should policymakers not do? <\/b><\/font><\/h4>\nA: <\/font><\/b>They should steer clear of taxing transactions (e.g. land transfer tax) and other measures impeding labour mobility or the ability of Canadians to move to a better-suited home. They should also resist providing more help for first-time homebuyers. Without corresponding measures to boost supply, any measures that ultimately heat up demand further\u2014while probably helpful to the first people who take advantage of them\u2014increase the odds of perpetuating problematic price trends and household debt issues. <\/p>\n
This isn\u2019t to suggest there are glaring policy holes to fill in Canada. Canadian policymakers implemented several rounds of rule tightening after the global financial crisis in an effort to calm activity in the priciest markets. These measures strengthened the resilience of Canadian households and the financial sector, and limited the federal government\u2019s exposure to any housing market downturn. <\/p>\n
Lastly, don\u2019t look for the Bank of Canada to alter its policy course to address housing-market issues. It made it very clear long ago that it sees macro prudential measures as the appropriate tools to use. <\/p>\n
Q: What are some options to address lack of supply and strong demand? <\/b><\/font><\/h4>\nA: <\/font><\/b>First off, policymakers should re-double efforts to address supply issues that existed before the pandemic. These include lightening the regulatory burden for new housing approvals to quicken supply response; adjusting municipal zoning to allow more medium-density, family-friendly housing in large urban areas (the so-called \u2018missing middle\u2019); growing Canada\u2019s stock of affordable housing significantly; and removing disincentives to build (market) rental apartments\u2014or better yet, tipping the scale in their favour. The need for more affordable rental options for ordinary Canadians is greater than ever. Most of the supply-side measures we\u2019ve outlined here fall into local authorities\u2019 lap, although higher levels of government have a role to play. However, they aren\u2019t quick fixes. <\/p>\n Further tightening of mortgage-lending rules could be necessary if signs of household debt stress emerge. Historic government aid and financial institutions\u2019 debt payment deferral programs have distorted the household debt picture since the pandemic\u2014debt ratios, and delinquency and bankruptcy trends look surprisingly benign. There could be issues brewing beneath the surface, however. Policy options include a stricter stress test, raising the minimum down payment and lowering the cap on refinancing. <\/p>\n
Policymakers should look at a range of options to discourage speculative activity as this could generate further volatility. We find New Zealand\u2019s just-announced phasing-out of mortgage interest expense tax-deductibility for investors an interesting proposal. <\/p>\n
Over the longer term policymakers should undertake a more holistic review of housing policy to ensure it is not contributing to any distortions in the market. The housing policy mix should be revisited to reflect a changing economic environment, evolving demographics trends and a lower for longer interest rate backdrop. Given wide-reaching implications, a thorough, comprehensive examination of all related aspects would be necessary. One of the more significant proposals would be to revisit the principal residence exemption from capital gains tax. With many Canadians having built their wealth (and retirement plans) on realizing the full value of their home, any amendments would have to carefully balance the impact on the housing market and the financial security of Canadians, and apply only on a go-forward basis. Always complex, such a proposal may prove more of a theoretical exercise than a politically viable one. <\/p>\n
One thing is certain: there are no silver bullets. All demand-side options have side-effects and work, at best, for a limited time. <\/p>\n
Q: In the context of the current housing market, what should policymakers not do? <\/b><\/font><\/h4>\nA: <\/font><\/b>They should steer clear of taxing transactions (e.g. land transfer tax) and other measures impeding labour mobility or the ability of Canadians to move to a better-suited home. They should also resist providing more help for first-time homebuyers. Without corresponding measures to boost supply, any measures that ultimately heat up demand further\u2014while probably helpful to the first people who take advantage of them\u2014increase the odds of perpetuating problematic price trends and household debt issues. <\/p>\n
Further tightening of mortgage-lending rules could be necessary if signs of household debt stress emerge. Historic government aid and financial institutions\u2019 debt payment deferral programs have distorted the household debt picture since the pandemic\u2014debt ratios, and delinquency and bankruptcy trends look surprisingly benign. There could be issues brewing beneath the surface, however. Policy options include a stricter stress test, raising the minimum down payment and lowering the cap on refinancing. <\/p>\n
Policymakers should look at a range of options to discourage speculative activity as this could generate further volatility. We find New Zealand\u2019s just-announced phasing-out of mortgage interest expense tax-deductibility for investors an interesting proposal. <\/p>\n
Over the longer term policymakers should undertake a more holistic review of housing policy to ensure it is not contributing to any distortions in the market. The housing policy mix should be revisited to reflect a changing economic environment, evolving demographics trends and a lower for longer interest rate backdrop. Given wide-reaching implications, a thorough, comprehensive examination of all related aspects would be necessary. One of the more significant proposals would be to revisit the principal residence exemption from capital gains tax. With many Canadians having built their wealth (and retirement plans) on realizing the full value of their home, any amendments would have to carefully balance the impact on the housing market and the financial security of Canadians, and apply only on a go-forward basis. Always complex, such a proposal may prove more of a theoretical exercise than a politically viable one. <\/p>\n
One thing is certain: there are no silver bullets. All demand-side options have side-effects and work, at best, for a limited time. <\/p>\n
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