In light of the recent changes to mortgage lending rules that have been put into place by the federal government, some have speculated that the Toronto real estate market is about to crash. But what does this mean for homeowners and homebuyers in the Greater Toronto Area? For answers, see this article.
Here’s what we believe is the real truth.
A number of analysts in the media have been speculating that the rule change put into place by the new Canadian government (the previous federal government had left many of these rules in place during the previous Justin Trudeau administration) is going to force many homebuyers to put their properties on the market before it is too late. The new tightening of gunk that locks up and restricts the ability of people to borrow is currently making its way through the regulatory gauntlet that the incoming Trudeau administration is leaving in its wake, and it threatens to upend the capital markets of all of the major cities across the country as well. Many people remain sceptical, however, as the country is in the middle of a severe housing shortage and there seems to be little incentive or incentive to sell a house before the moratorium is lifted, especially considering that many of these properties will probably end up being condemned and wiped out.
But as has been the case in the past, once the dust settles and markets clear, especially as it pertains to the Greater Toronto Area and its surrounding areas, we may find that there were foreshadowing signs that this particular gauntlet was about to be thrown down.
The changes put into place back in March by the new Trudeau administration were the first of several that have been implemented due to concerns regarding the state of the Canadian economy. The changes have caused the Canadian dollar to depreciate considerably against the U.S. dollar, which has sent shock waves throughout the non-energy sectors of the economy. When the Toronto and Vancouver housing markets began to decelerate heavily, sending ripples throughout the entire economy, many strategists argued that the new measures to rein in housing prices were actually a longer-term fix than the main issue that many people assumed to be the primary problem with the housing market.
Many saw the Toronto and Vancouver housing markets, in particular, to be overvalued (even by the standards of the U.S. or U.K.), which meant that new funds needed to be let in to encourage supply.
In the most recent (and most forceful) effort to try and get market sentiment and sentiment towards the housing market back in check, on November 22, the Trudeau government provided legal immunity to owners of unlicensed real estate agents in the country.
Add this to the list of rationalizations offered by Canadian policymakers in the wake of the coronavirus pandemic, like postponing the maple syrup tax until 2021.
While all of the culprits are likely contributing factors to the current housing debacle, sub-prime lending by unregulated third parties (including banks) deserves much of the blame. These private sector shenanigans have infected our economy at scale, contributing to record levels of household debt and imprudent asset-price imbalances. Even prior to the pandemic, we saw the fallout of these irresponsible home loans when flipping houses became prohibitively difficult.
Voters may soon get a clear indication of just how bad the situation really is when a coronavirus-compliant property is auctioned in Vancouver this summer. Following in the footsteps of Toronto, the Vancouver city council has already voted to impose a 15% tax on investors flipping properties — or those who are in the process of flipping them. Currently, investors can apply for a non-restricted property a maximum of three times in a 12-month period.
The move by the Vancouver city council mimics similar measures taken by Edmonton and Toronto. The rationale for taxing flipping activity rests on the city’s desire to prevent home prices from inflated even further. According to The Economist, inflated home prices have led investors to shift their money to properties in larger cities. Incentivized by the tax on investors in Toronto and Vancouver, more and more buyers and sellers are sharing condos.
Adding to the speculative fever fueled by record cheap interest rates, larger amounts of consumer debt have made Canadian households increasingly unstable. As my colleague Dom Gottardi has written previously, households are spending more and more of their income to service their debt. In turn, investors in risky properties that depreciate faster than their condo payments instigate greater borrowing and riskier behaviours to consolidate their incorrect financial position.
While there has been extensive analysis to determine who is to blame for this mess, it is important to note that neither local nor national regulators have done enough to rein in these broken institutions. Crown corporations within the federal or provincial governments can regulate real estate practices that are deemed to be in the public interest, but banks continue to operate outside the boundaries of such legislation with impunity. Or, as Ottawa put it, “No foreign ownership rules for banks.”
Instead of using harmful punishment to deter irresponsible behaviours that add to the social problems we face, we need to set powerful and far-reaching incentives to curb reckless borrowing and irresponsible real estate speculation. One solution is to separate responsible and careless investment activities.