Is talk of an overheated housing market full of hot air?

by Neil Sharma on 09 Mar 2021

Whispers of bubble conditions in Canada’s housing market have become cacophonous of late and, consequently, the spectre of regulation has begun looming.

“Be on guard for macroprudential measures,” Derek Holt, Scotiabank’s head of capital markets economics, wrote in a letter to clients on March 2. “Ottawa has been caught completely off-guard in the magnitude of the housing response to very low financing costs.”

Benjamin Tal, deputy chief economist of CIBC Capital Markets, lent his voice to the fray and, according to BNN, warned that the country’s housing market could be “entering a speculative phase.”

“It’s possible given the recent increases in prices, that some people are speculating about further increases in prices,” he said. “That was missing in the market until now.”

However, not everybody agrees with such analyses. Dustan Woodhouse, president of Mortgage Architects, says that foreign speculation is impossible because mortgage lenders aren’t presently loaning out-of-country Canadians any money, let alone foreign nationals, thereby precluding the possibility that foreign money is to blame for white-hot market conditions. Yet Canada’s federal government is hell-bent on introducing a nationwide foreign buyer tax.

“There aren’t any signs of speculation. The majority of transactions are for owner-occupied properties—that’s what we’re seeing—and we don’t have foreign buyers,” Woodhouse told CREW. “Why is it so hard to understand we haven’t kept up with building housing? More Canadians are living alone than ever before. The notion of the Bank of Canada increasing interest rates to slow down the real estate market is laughable. That’s a notion put forward by people incapable of doing math, because a quarter-point increase to the average mortgage, which is $400,000, raises it by $60.”

Woodhouse added that raising interest rates by 0.25-1% would spur even more activity in the housing market because buyers will begin thinking they’ll be priced out of the market if they don’t act fast. Unless the overnight rate is over 3%, market activity won’t decelerate.

The reason homes are selling like hotcakes is that non-essential outlays have drastically declined. Incapable of spending money on travel, expensive restaurants or on other entertainment, like sports game, Canadians are instead upgrading their living situations.

“Canadians have over $200 billion now in additional savings just sitting there,” said Woodhouse, “because they can’t go out and eat, or to the movies, or on vacation. Go back to dual-income households—two people still working in a two-bedroom condo, where they both need to be on Zoom meetings, is untenable for a year, and now they’re being told they might have to spend another year living like that? They’re selling and moving up. The market is being driven by fundamentals.”

The Bank of Canada will make an interest rate announcement on March 10, although there doesn’t appear to be much indication that a rate hike is in the cards this week. Tiff Macklem noted that there are signs of “excess exuberance,” but he doesn’t appear ready to introduce cooling measures just yet.

“The economy is weak, we are just coming out of the second wave, we need the growth we can get,” BNN quoted Macklem. “I think we need to watch things very closely but I’m not recommending new measures right now.”

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