On Tuesday, in a Bank of Canada speech about risks to the country’s financial stability, it was the hot housing market – in particular investors and their role in pushing prices ever higher – that garnered all the attention.
The central bank’s research has revealed that purchases by investors are rising far faster, on a percentage basis, than people buying homes to live in them. This surge has doubled since the start of the pandemic; the Bank of Canada earlier this year reported that investors account for one out of five residential real estate deals.
This “sudden influx of investors,” Paul Beaudry, a Bank of Canada deputy governor, said on Tuesday, is likely a contributor to the rapid increase in home prices this year. Mr. Beaudry suggested such investors may expect prices to keep rising, and said this can “expose the market to a higher chance of a correction.” Should that happen, “the damage can spread far beyond investors.”
Mr. Beaudry tried to emphasize the country is not on the verge of big trouble – “none of that is to say a calamity is on the horizon” – but this marks the first time the central bank has specifically warned Canadians about the role of investors in housing.
It is not, however, the first time the bank has warned about the risks of a haywire housing market. In May, the central bank, deploying the verbiage of economists, worried about “expectations becoming extrapolative” in housing – that is, the belief that prices will continue to rise. As everyone knows, but sometimes forgets in moments of mania, nothing goes up forever.
The Canadian housing market is doubtlessly stretched. The average national price has shot higher by almost a third from the start of the pandemic. In some places, such as North Bay, Ont., and Cape Breton, prices have almost doubled. Houses in the Toronto suburbs are going for $1.2-million – five times more than the early 2000s.
Canada Mortgage and Housing Corp. believes speculative investors are in part to blame, as they add “extra froth to the market.” But the broader role of investors is varied and not fully understood. They have contributed to the rental supply in places such as Toronto, owning about 40 per cent of the condos there. The Bank of Canada is working to assess what investors have been buying, as well as where and why, and whether they would be likelier to sell if prices fell, thus exacerbating a decline.
Market corrections come in many shapes and sizes. The epic one of recent memory, and one absolutely fuelled by speculative fervour, is the 2008 crash in the United States. Prices nationwide fell 27 per cent. In markets such as Phoenix, homes lost more than half their value.
Looking farther back in Canada, Toronto’s housing market peaked in 1989, fell by a third, and didn’t recoup losses until the 2000s. More recently, Vancouver and Toronto peaked in 2017-18 after a frenzy and prices fell by close to 10 per cent. They have, of course, reached new heights – as has the U.S., where the current national housing market is almost 50 per cent higher than the precrash bubble of 2006.
The federal Liberals offered a bevy of housing promises during the election campaign, some to propel buying and some to dissuade it. Among the market-dampening promises was a pledge to tax people who flip properties in less than a year. There is also a proposed two-year ban on foreign ownership – though the Bank of Canada this week said investors are mostly domestic. The Liberals also promise to “stop excessive profits in the financialization of housing,” thereby taking on large investors.
The best long-term answer to the housing bubble remains additional supply. Investors are drawn to the market because cities across Canada for decades have restricted the building of new housing. That may be, finally, starting to change. Vancouver city planners have put forth the outlines of new density in neighbourhoods of single-family homes, places where the population is static or even in decline. Toronto is moving toward the same goal.
Today’s housing market is the result of decades of public policy that has led to too little housing. Low interest rates, rising immigration and economic growth have all helped send prices into the stratosphere. Investors are a factor – and their role may make an already stretched market potentially fragile. If things go backward, the pain could be widespread.
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