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A year ago, the Canadian Real Estate Association’s benchmark of housing prices hit a new record, at nearly $600,000. But that was hardly news. Prices had been hitting new records for years, as an always-hot housing market ticked ever higher.

Then the pandemic hit. Canada Mortgage and Housing Corp. last May predicted that home prices might fall by as much as 18 per cent. The opposite happened. After a brief pullback, prices surged – and not just in Toronto and Vancouver. CREA’s aggregate composite national benchmark price hit $676,600 in January, up 13.5 per cent in the past 12 months.

This is not what normally happens in a recession.

But this pandemic recession has been unlike economic downturns of the past. People in lower-wage work suffered the bulk of job losses, while the number of people working in industries that pay above-average are at a record high. Long-term borrowing costs have never been lower (though bond yields jumped sharply this month), with central banks worldwide supporting fragile economies. Meanwhile, Canada’s supply of real estate for sale is particularly tight.

The result is an expensive housing market that’s become even more expensive.

The situation has the attention of Bank of Canada Governor Tiff Macklem. A housing price surge is not welcomed by the central bank, and Mr. Macklem this week said he sees “some early signs of excess exuberance.” But his focus remains on keeping interest rates low, and for a long time, to bolster the economy and, especially, jobs. For now, he’s not overly worried about housing. “We’re a long way from where we were in say 2016, 2017, when things were really hot.”

That view is not universally shared.

The investment bank UBS last fall listed Toronto among one of several global cities whose out-of-whack housing prices put it in the “bubble risk” category. Vancouver was not far behind.

And while 2016 and 2017 were such hot times for Canadian real estate that it provoked responses to cool the market, economists at National Bank point out that the period’s outsized gains were restricted to only half of the country’s markets. Now, prices in all markets in Canada are climbing, with gains of 10 per cent or more in two-thirds of markets, a record. National Bank says there are more vulnerable borrowers – high-debt, uninsured mortgages – than in 2017.

Canada is not alone in this real estate frenzy. Prices are rising in most wealthy countries – but the story is bigger and more widespread here. In the United States, only about 20 per cent of markets are seeing big gains.

What it all adds up to is serious inflation in the price of Canadian housing.

Over the past two decades, prices have nearly quadrupled, increasing at an annual rate of 6.7 per cent. Inflation across the economy as a whole was just 1.9 per cent a year. One dollar of goods and services from 2000 costs $1.48 today – but $1 in year-2000 housing is now worth $3.66.

There are multiple factors at work, from economic growth to immigration. But low interest rates have been a key driver – especially in the past year. A hurting economy needs low rates to encourage businesses to invest and people to spend. But a side effect can be inflation in asset prices – from stock markets to housing.

There is also a problem in supply. The Toronto Regional Real Estate Board predicted this month that the average price in the Greater Toronto Area will crack $1-million this year. It pointed to the need for “missing middle” housing and blamed zoning restrictions. If fewer neighbourhoods were zoned solely for single-family homes, the board says as many as 400,000 units could be added in Toronto.

In terms of immediate remedies, Mr. Macklem is obviously right that the central bank should not be raising interest rates with the economy so far from full employment. But there are other policy levers to preserve the good effects of low interest rates, and mitigate the bad. When prices boomed in 2016 and 2017, governments in British Columbia and Ontario enacted new taxes, and the federal banking regulator tightened mortgage lending rules, the so-called stress test.

It is time for Finance Minister Chrystia Freeland to signal a readiness to take action once again. The real economy needs an infusion of pep, but as for the housing market, it needs to be given an Ambien.

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