The Bank of Canada is not known for poetic flourish, but in its description of the frenzy at the heart of Canada’s housing market, there is a delightful rhythm, catchy alliteration and plenty of truth.
Simply put: prices are rising, partly because buyers believe they will continue to rise. People are assuming the future of high prices, extrapolating from the present where prices are rising rapidly.
These perceptions are a very human tendency. But they are also dangerous, as additional expectations eventually hit a wall. In reviewing its annual financial system released last week, the central bank cited “housing market imbalance” as one of the six major weaknesses. It also worried about the “many houses” that are now mortgaging big. In the event of a job loss or other setback, their debt burden can quickly become unattainable.
The bank is just the latest institution to worry about the direction of the Canadian housing market. Yet for all the concerns, none of the policy makers of this country is willing to do much about it.
To reiterate clearly, the market has gone bonkers. More homes were sold in March than in any month, and things slowed down a bit in April, yet it was the busiest April ever. Meanwhile, prices keep climbing. According to the Canadian Real Estate Association, its April national domestic price index 23.1 percent more than a year earlier. The speed of gain has become a supernova and is now too much compared to previous bounce in 2006-07 and 2016-17.
Federal Liberals are eyeing an election and afraid of tough choices that could upset homeowners, are timid. Provincial governments are also doing the same. Municipalities, too. This is despite the insistence of many economists. At the end of March, Bank of Montreal The Economist called on policymakers to “take immediate action” to break a “market psychology … that prices would rise further”.
One unit that has the power to crush a storm is the Bank of Canada. But 8.1 percent unemployment and the country is still in the grip of an epidemic, the central bank is not going to raise interest rates. It can neither suffocate nor bend the economy in an attempt to slow down housing prices.
As a result, Bank of Canada Governor Tiff Macklem issued a stern warning to buyers.
“Some people may be thinking that the kind of price increases we have seen recently will continue,” Mr. McAlem said last Thursday. “That would be a mistake.”
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“Let us not get out of the current rapid increase in prices seen. Don’t expect them to continue indefinitely.”
It is good that Mr. Macklem is sounding the alarm, even if he is not a fire extinguisher. People with equipment are elected officials of Canada.
Added to the list of concerns is the possibility that the current housing-price increase – allowed to run unbridled – is permanently changing the complexion of Canada’s housing market. In cities such as Toronto and Vancouver, it has been a long time for housing to be cheap. But it has become so expensive now that, in the absence of the help of deep-pocketed parents, even for young people with high incomes and solid savings, it is difficult, if not impossible, to buy. And if they are struggling, what about everyone else?
There has been some serious disturbances in the Canadian housing market. This year’s price increase is the result of years of politicians’ decisions and indecision at all levels, including municipalities. Construction of housing in Canada is restricted in a lot of neighborhoods, with zoning designed to effectively stabilize the number and size of existing buildings, preventing the addition of more homes. Meanwhile, at the provincial and federal levels, governments largely ignored housing.
If many people cannot afford to live in the country’s big cities, where the energy of the economy is the largest, it will hurt Canada’s prospects. It will also be a betrayal of the youth of this country. Generations of middle-class Canadians were able to buy a place to live, through consolidated savings and hard work. That equation is threatened.
Mr. McCleam’s urge to exercise caution is prudent. But fixing it is going to take more than words of warning.
