Explaining Canada’s Housing Market ‘Madness’

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Benjamin Tal

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Benjamin Tal, deputy chief economist, CIBC.

To what extent we can explain the madness that we call the Canadian housing market? Clearly, the market is on fire, and I think if you look at the overall situation, it still makes sense for two reasons.

One is we have seen a significant decline in interest rates. And the other: this has been the most asymmetrical recession ever in terms of all the job loss — not some — all the job loss during this crisis were low-paying jobs. In fact, high-paying jobs, their number went up by 350,000 positions.

So, we have a situation in which people are able to take advantage of extremely low interest rates. And currently, there is this sense of urgency to get into the market due to extremely low interest rates. And therefore, we are basically borrowing activity from the future. That’s what’s happening now.

In this sense, the question is, to what extent policy-makers can change that direction, that trajectory? And the short answer is really, they are very limited in their ability to do so. You cannot fight extremely low interest rates in this environment. The motivation to be in the market is there.

So, what we are doing at this point is only at the margin. Clearly, the changes to stress tests are going to help a little bit, but it will impact only $70,000 of qualification. People can easily go beyond that. So, it will not be a game changer.

A few more things can be done at the margin. You can punish speculators with higher taxes, you can tax vacant units — do all kinds of things like that. 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. 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.

From a longer-term perspective, the number one issue facing the Canadian housing market in general — and cities like Toronto, Vancouver in particular — is the supply issue. We simply don’t have enough supply. We are trying to fight supply issues using demand tools, and that’s why it’s not working.

I believe that the housing market will remain strong. The spring will be relatively strong, and then when interest rates start rising you will see some deceleration in activity.

The big issue, of course, is not just the next six months or the next year. I do believe that in the short term, the activity will remain robust. 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 — where we reach, I believe, a price resistance level. In fact, the condo space probably will outperform the low-rise segment of the market over the next year or two.

But we have to look beyond that. And I believe that the big issue, as I mentioned, is supply. The only way to introduce supply to the market is to introduce a rental element to the equation. I believe that the purpose-built rentals — not only the condo space but the purpose-built rental — is the only solution to the affordability crisis facing Vancouver, Toronto, Montreal, Ottawa and many other cities.

What I mean by that: We have to allow more supply to enter the market — rental supply. And we have to have a situation in which you are 35 years old, you are married, you have two kids, and you are renting? Nothing is wrong with you! We have to change the way we look at the rental market and the way we treat the rental market. It must be part of the solution, the way it is in Manhattan, Berlin, London. Otherwise, Toronto, Vancouver will never be affordable to young families.