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Policymakers need to intervene in housing market: RBC

by Neil Sharma on 29 Mar 2021

Canada’s overheated housing market could destabilize the country’s economy if a housing correction occurs and policymakers should intervene by introducing measures to increase supply, asserts RBC Economics.

“First off, policymakers should redouble efforts to address supply issues that existed before the pandemic,” wrote RBC’s Robert Hogue. “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 ‘missing middle’); growing Canada’s stock of affordable housing significantly; and removing disincentives to build (market) rental apartments—or better yet, tipping the scale in their favour. The need for affordable rental options for ordinary Canadians is greater than ever.”

Canada’s housing market has become feverish because demand has vastly outpaced inventory and property values have grown beyond historical norms. The Toronto and Vancouver markets used to induce anxiety, but today prices are growing fastest in the country’s smaller markets from Mission, British Columbia, to Moncton, New Brunswick.

Hogue attributes the scorching nationwide housing market to robust labour markets, rock bottom interest rates, evolving housing needs and surging household savings, all of which have conspired to create vigorous demand and push housing prices skyward. And as prices continue climbing, Canadians afraid of being priced out of the market are buying in a frenzy.

In addition to recommending supply side policies to curb runaway housing prices, Hogue expressed support for rescinding the principal residence exemption from capital gains tax, although he concedes it would be an unpopular policy. Still, with interest rates slated to remain low for some time to come, such a measure would still be palatable.

“Further tightening of mortgage-lending rules could be necessary if signs of household debt stress emerge. Historic government aid and financial institutions’ debt payment deferral programs have distorted the household debt picture since the pandemic—debt 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.”

Hogue also noted that New Zealand recently phased out mortgage interest expense tax-deductibility for investors, and he believes a similar policy in Canada could discourage speculation. Additionally, Hogue’s report contained policy warnings: do not tax transactions and avoid measures that impede labour mobility or Canadians’ abilities to move into homes that better suit their needs.

“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—while probably helpful to the first people who take advantage of them—increase the odds of perpetuating problematic price trends and household debt issues.”



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