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What a 'multi-faceted solution' for cooling the real estate market means

Danielle Boudreau
Royal Bank president David McKay speaks at the Royal Bank of Canada annual meeting in Toronto on Thursday, April 6, 2017. THE CANADIAN PRESS/Frank Gunn
Royal Bank president David McKay speaks at the Royal Bank of Canada annual meeting in Toronto on Thursday, April 6, 2017. THE CANADIAN PRESS/Frank Gunn

The term “housing bubble” has been thrown around for years now by experts, pundits and every self-professed “expert” on social media who claims a crash is looming.

The Toronto Real Estate Board reported that the average property in the Greater Toronto Area (GTA) was $916,567 in March, an increase of 33.2 per cent over the same period last year.

Speaking at RBC’s annual shareholder meeting in Toronto recently, Dave McKay, the bank’s President and CEO, raised alarm bells about Canada’s real estate market. “I’m increasingly concerned by the unhealthy combination of factors that have driven the market to the current point of strain,” he said.

What’s the problem?

McKay listed persistent supply and demand imbalances in the greater Toronto and Vancouver areas, low interest rates, and speculative activity as reasons for a growing problem in those cities.

“All of these factors are mixing to push prices up to unsustainable levels, stressing household balance sheets and locking many people out of the housing market,” says McKay.

It’s extremely hard to build in Vancouver, The region’s geography, with the ocean and mountains close by, and government regulations that allow for single-family zoning in the city all contributing to the supply shortage in the city.

In the GTA, supply of available homes is also an issue. Gregory Klump, Chief Economist at the Canadian Real Estate Association (CREA), explains how a shortage of listings has a domino effect on the market. “Many potential move-up buyers find themselves outbid in multiple-offer situations amid a short supply of listings,” he said in a release. “As a result, they aren’t putting their current home on the market. It’s something of a vicious circle from the standpoint of a supply shortage and a challenge for first-time and move-up home buyers alike.”

Is there a Bubble?

It’s a hard call in markets where it’s difficult to build, says Thomas Davidoff, Associate Professor in the strategy and business economics division in the UBC Sauder School of Business. Supply and demand both matter, and there’s a lot of uncertainty, especially in Vancouver.

A CIBC poll found that 54 per cent of Canadians think that housing prices will rise indefinitely, with 40 percent thinking that we’ll see a decline in the next five years.

David Madani, a senior economist at Capital Economics told BNN that this “unbridled optimism” is one sign of a bubble in the Toronto housing market.

<em>Source: Toronto Real Estate Board</em>
Source: Toronto Real Estate Board

Toronto prices have been climbing for more than 20 years, with only a small recession-related blip in 2009 recession.

The large Toronto market is skewing the average; some markets such as Regina, Ottawa, Greater Montreal, and Greater Moncton show modest gains, and prices are more than 5 per cent off their peak in Calgary or Saskatoon this year.


“Any single solution is unlikely to be successful on its own,” says McKay, who says that a “multi-faceted solution” is necessary.

“We believe that if this issue goes unchecked, it could drag on consumer spending, locking up too much capital unproductively, and potentially becoming an inhibitor to Canada’s future economic growth,” he said.

As part of McKay’s “multi-faceted solution,” he refers to two major areas of focus that are required to help cool the housing market.

Tax Changes

The 15-per cent foreign buyer tax introduced by the B.C. government last August definitely had a big impact on multi-million-dollar homes, pushing out foreign buyers and causing the supply of available homes in Vancouver to drop 24.1 in a year-over-year comparison. Davidoff wryly explained: “it’s not a racist tax, but if I were racist I would like it.”

Davidoff says that Canada’s high income tax rates make it expensive to work in this country, but it’s cheap to buy property. To adjust the market, he proposes a twofold plan of lowering income taxes and raise property taxes that ignores the nationality of buyers.

People working and paying income tax would have more take-home pay which would help them enter the property market, and higher property taxes would decrease the incentive to use real estate as an investment. He also suggests offering incentives for owners who rent their properties, which would have the positive effect of increasing the supply of rentals available. This proposal, co-written by Davidoff, is explained in depth here.

Public Policy

The Smart Cities Challenge was announced last month in the Federal budget, with the goal of encouraging local governments, businesses and citizens to grow cities more sustainably using innovative approaches to city-building. This nationwide, merit-based competition was designed to fined ways to create safer neighbourhoods, breathe cleaner air, and drink cleaner water.

In the same federal budget, a National Housing Strategy was announced, with $11.2 billion earmarked to “build, renew and repair Canada’s stock of affordable housing.”

In an effort to crack down on taxpayers dodging capital gains taxes on property, The Canada Revenue Agency has announced a change to its reporting requirements. Property owners must declare any 2016 property sale, even one that meets the qualifications of the principal residence exemption, or face paying fines and capital gains on any profit on the property.

More measures are coming. Ontario Premier Kathleen Wynne promises a package of affordability measures for her province “very soon.”

No Easy Answers

When looking for answers, it’s tempting to look for simple correlations, but Davidoff cautions against “counterfactual” arguments such as finding a link between Toronto’s rising property prices and Vancouver’s foreign buyer tax.

“If the tax hadn’t been there, would Vancouver’s prices have risen as fast as Toronto’s this year?” asks Davidoff. Perhaps, or other factors, such as the financial climate in other countries such as China, could also affect the rate, he says. Because of that uncertainty, we may never know exactly what effect the tax had.