Investor-fuelled housing mania puts Central Canada’s biggest cities at risk of correction: Bank of Canada
Kevin Carmichael: Montreal might now be the city most at risk of a downturn in the real-estate market
Ground zero of the national housing crunch has shifted to Central Canada’s biggest cities, and excess demand appears to be coming from investors, not households, according to the Bank of Canada’s bi-annual review of the financial system.
The housing mania that has gripped the country for more than a decade originated in Vancouver, where the combination of ultra-low interest rates, international money and low supply combined to ignite a real-estate boom that captured global attention, and eventually morphed into an affordability crisis that turned housing into an important political issue.
But demand and supply in British Columbia’s main urban centre has been roughly balanced since the end of 2019, according to the Bank of Canada’s House Price Exuberance Indicator, which combines various strands of housing data to assess whether prices have become “extrapolative,” the central bank’s word for demand explained by an expectation that prices will keep rising, not market fundamentals such as population growth and the rate of housing starts.
The Bank of Canada’s ability to influence housing prices is often overstated. Higher interest rates would deflate demand, but policy-makers would rather avoid harming the prospects of households and businesses to disrupt excessive speculation in individual cities. The central bank has no regulatory power, so all it can do is use its analytical heft to advise politicians and regulators of the situation.
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“It starts at the municipal level,” Christopher Alexander, president of Re/Max Holdings Inc.’s Canadian unit, told the Financial Post’s Larysa Harapyn this week, citing land-transfer taxes, the slow approval of building permits, and local fights over whether cities build up or continue to sprawl as barriers to accelerating supply. “It’s becoming more and more of a crisis. We can’t keep doing more of the same or we’re going to get the same result.”