Fiery home prices imperil ‘majority of the populated areas of Ontario’

Theglobeandmail.com
April 19, 2017
By Michael Babad

Mr. Hogue’s take on the latest Canadian housing report sums it up: Analysts are warning that the Toronto bubble isn’t just inflating, but also threatening to spread far and wide.

The Canadian Real Estate Association’s report Tuesday showed national home sales up 6.6 per cent in March from a year earlier, the average cost up 8.2 per cent, and the more important MLS price index up 18.6 per cent.

But, as they say, you ain’t seen nothing yet:

The average price in Toronto surged 32 per cent in March from a year earlier. Prices rose in the Ontario centres of Windsor by 21 per cent, London by 21.5 per cent, Thunder Bay by 29 per cent, and Kitchener-Waterloo by 32.4 per cent, Bank of Montreal noted.

And, ouch, St. Catharines by 39.7 per cent.

Here’s how BMO chief economist Douglas Porter put it after seeing the numbers: “Somebody call 911. House fire burning ... in Ontario.”

This won’t go unchecked. As The Globe and Mail’s Janet McFarland and Justin Giovannetti report, federal Finance Minister Bill Morneau met Tuesday with his Ontario counterpart, Charles Sousa, and Toronto Mayor John Tory to discuss the city’s housing bubble.

They agreed they would do nothing that could drive prices further, and Mr. Sousa reiterated he plans to unveil measures in the next week.

In the wake of the meeting and the monthly report, it’s worth looking at what observers are warning, and what they think should be done about:

What they think

“The speed at which [Ontario] home prices are rising has become a cause for concern with unsustainable home price growth at least in part attributed to speculative activity ... The best available five-year fixed mortgage rate is down 10 basis points from a month ago. Should the lower rates persist, home price growth could top 25 per cent this year in Ontario, putting the onus on policy makers to take some action, which could come as early as Ontario’s Budget Plan 2017.” Diana Petramala, economist, Toronto-Dominion Bank

“We believe that the current market dynamics in Toronto and the rest of Southern Ontario pose significant risks to the stability of the market over the medium term and that targeted policy intervention is needed. Runaway prices have decoupled from the area’s still-strong economic and demographic fundamentals, and we believe that the ongoing upward price spiral is being fuelled primarily by overly exuberant expectations on the part of both buyers and sellers.” Mr. Hogue, Royal Bank of Canada

“Almost the entire province of Ontario’s housing market is now on fire, while most of the rest of the country wonders what all the fuss is about.” Mr. Porter, BMO

“Based on the historical relationship between sales-to-new listings and price appreciation, there is increasing evidence of speculative activity in some markets, primarily in and around the GTA.” Adrienne Warren, senior economist, Bank of Nova Scotia

“Canadians should be pleased that the Ontario budget, to be released on April 27, will likely include a series of measures tackling this housing affordability crisis.” Sebastien Lavoie, chief economist, Laurentian Bank Securities

“Can Toronto sustain one-third annual price increases? I doubt it. Some of it is explainable by temporary fundamentals, while the rest is a feeding frenzy and they often end in tears.” Derek Holt, head of capital markets economics, Bank of Nova Scotia

What should be done, and warnings

Mr. Sousa is looking at the possibility of a speculation levy on foreign buyers. Other measures that have been tossed about include a Vancouver-style tax on all foreign buyers and a tax on vacant properties.

Also proposed by one economist is a tax on home flippers that would decline over a two-year period.

Here’s what the analysts say:

“The time for this advice was arguably ages ago, but applying material policy tightening at such elevated peaks in the market risks a case of being careful about what you ask for into elections in Ontario next year and at the federal level in 2019 ... Rich housing valuations already permeate much of the economy and behaviour, and taking steps against it at such elevated levels risks seriously damaging the economy. Housing policy should arguably be in damage control mode, averse to sharp monetary policy tightening or sharp tightening of policy rules.” Mr. Holt, Bank of Nova Scotia

“To be successful at cooling the market down, any suite of policy measures being proposed must rein in price expectations. This suite, therefore, must be credible and send a strong message to all stakeholders about the future direction of prices. Policy makers also should stand ready to adjust the suite of measures as needed.” Mr. Hogue, RBC

“We are confident that the Ontario government will, similarly to what the B.C. government did during the last year, opt for a “step by step” approach to remedy the situation ... It would be risky to implement too many stricter policies at once as no one wants to see the value of their real estate assets decline significantly and cause a national housing and mortgage crisis. A balanced approach would first allow for the initial implementation of a few restrictive measures and then closely examine their impact on housing activity.” Mr. Lavoie, Laurentian.