Explaining Canada’s housing market ‘madness’

While there’s an element of “madness” right now in the Canadian housing market, CIBC deputy chief economist Benjamin Tal says there’s a method to it.

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“It still makes sense for two reasons,” Tal said in an interview earlier this month. First, historically low interest rates; second, an incredibly asymmetrical recession. Virtually all the jobs lost during the pandemic have been low-paying, while the Canadian economy has added roughly 350,000 high-paying jobs, he said.

“We have a situation in which people are able to take advantage of extremely low interest rates,” Tal said.

Monthly home sales hit an all-time record in March, according to the Canadian Real Estate Association, with bidding wars and aggressive tactics spreading beyond Toronto and Vancouver.

For policy-makers, the options for cooling the market are limited. “You cannot fight extremely low interest rates in this environment,” Tal said. “The motivation to be in the market is there.”

The proposal last month from the Office of the Superintendent of Financial Institutions to tighten the stress test for uninsured mortgages will help a little bit, he said, but won’t be a game changer.

The effect of punishing speculators with higher taxes or taxing vacant units may also be marginal, he said. The Liberal government proposed a new tax on vacant homes owned by non-residents in last month’s federal budget.

“At the end of the day, the issue is that interest rates are way too low, and they’re inviting people and investors into the market,” Tal said. “In the short term, the only thing that will reverse the course of this housing market is higher interest rates, and the fact that now we are borrowing activity from the future.”

The longer-term solution is supply. As long as policy-makers fight supply issues using demand tools, he said, it won’t work.

He expects the housing market to remain strong in the short term. “Then I believe with interest rates rising, you will see some activity slowing — especially in the low-rise segment of the market that is simply unaffordable,” he said. “In fact, the condo space probably will outperform the low-rise segment of the market over the next year or two.”

Looking out further, Tal said increasing rental supply is the solution to the affordability crisis in Vancouver, Toronto, Montreal, Ottawa and other cities. And even more than that, Canadians will need to adjust their philosophy about home ownership.

“You are 35 years old, you are married, you have two kids, and you are renting? Nothing is wrong with you!” Tal said. “We have to change the way we look at the rental market and the way we treat the rental market.”

Other cities such as New York, London and Berlin have made purpose-built rentals part of the housing solution, he said. Canada needs to do the same, or young families will be priced out of big cities.

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