Bank of America Merrill Lynch (BofAML) experts sounded the alarm on what they called a “painful unwinding” of the three economies in the near future, the Financial Post
“Canada, Australia and New Zealand have all faced commodity shocks that have hampered growth and left the economy highly dependent on housing activity,” the BofAML economists said. “Despite mounting financial stability risks, central banks in these regions are stuck with low rates to stimulate growth.”
Coupled with the stunning growth of real estate in these territories, “we see no rate hikes on the horizon to stem financial stability risks as a slowdown in housing would impair growth,” they added.
And Canada is not alone in its current predicament of overseas buyers dominating its housing markets, BofAML stated.
“Evidence of a large foreign presence is abundant. For example, resale house prices fell by 19% [month-over-month] in Vancouver in August, the first month of a new foreign real estate transaction tax,” the analysts said. “This puts the onus on measures targeting foreign buyers such as foreign real estate taxes.”
And although “no happy ending” is currently in sight, BofAML strongly recommended that the three governments intervene right away before their respective real estate bubbles burst, especially since the risks brought about by the lack of affordability would lead to a catastrophic housing crash.
Last week, Vancouver mayor Gregor Robertson said that the British Columbia government has waited too long on imposing the 15 per cent foreign home buyers’ tax in the province. Official figures revealed that the city suffered from a 26 per cent year-over-year decline in housing sales volume in August.
“Middle-class Canadians being able to buy a house in Vancouver and Toronto, those days have probably passed because the interventions didn’t come,” Robertson said. “The dire warnings of the banks and financial institutions about the precipice that Vancouver or Toronto stands on with real estate and foreign investment have triggered waves of concern through the political ranks.”
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The sharp decline in the value of oil and other resources like metals, along with the unprecedented amount of wealth now flowing into real estate, represents a potentially lethal combination of factors for Canada, Australia, and New Zealand, U.S.-based economists warned.