JURY STILL OUT ON CANADA'S HOUSING 'BUBBLE', BUT A NATIONAL FIX WOULD DO MORE HARM THAN GOOD

Some think the Canadian housing market is in a bubble of epic proportions, while others believe it’s just a simple case where demand has outpaced supply, both in big and small cities.

But there’s no doubt that the rapid escalation of housing prices during a pandemic-induced recession is fuelling debate about what’s behind the surge and whether regulators can or should do something about it.

After a drastic drop in residential sales activity in April 2020, housing markets rebounded, with each successive month posting new sales records. Price increases soon followed. At the same time, the number of new listings was lower than home sales, resulting in more buyers competing for fewer properties.

Housing prices rose so fast during the downturn that they have surprised many industry observers. A quality- and size-adjusted housing price index produced by the Canadian Real Estate Association (CREA) showed that prices in February were up by 17 per cent year over year in large urban markets.

In Moncton, N.B., prices were up by 28 per cent. Prices escalated even faster in suburbs on the periphery of large cities, such as Barrie, Ont. (north of Toronto), where the increase was 34 per cent.

Much of the demand for housing has to do with ultra-low mortgage rates, which lower the monthly cost of ownership, and the nature of the pandemic-induced recession. White-collar, knowledge-economy workers, who are more likely to own a house, have largely been spared by the downturn, while those in sectors such as hospitality, travel and tourism — who are more likely to rent — have disproportionately suffered layoffs and financial hardship.

Teleworkers generated demand for larger homes at the expense of housing in the urban core. Prices, therefore, rose faster in the suburbs and beyond compared to the centre. But this is where conventional wisdom ends.

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Tsuriel Somerville, a professor of urban economics at the University of British Columbia in Vancouver, points out some ignored demographic undercurrents that may partially explain the real estate puzzle. COVID-19, he believes, might have accelerated some transactions that would have happened regardless, but over a more extended period.

Somerville said the oft-repeated argument that millennials are not keen on buying and are content with renting and living in a sharing economy has its limits. Eventually, millennials will get into the ownership market when their demographics dictate.

COVID-19 is likely the catalyst that hastened the transition to owning for some and encouraged others to move to a larger dwelling.

But as demand rapidly increased, supply lagged, at least in the resale market. Unlike buyers, sellers may not be motivated to plan both a sale and a subsequent move in the middle of a pandemic, Somerville said.

Sellers often stay on the sidelines when prices rapidly rise, waiting for the market to peak before they list, further constricting supply and contributing to price escalation.

That prices have considerably risen is not in dispute. Whether it is a bubble is a matter of debate. David Rosenberg, president of Rosenberg Research & Associates Inc., is not one to mince words and he believes that we are witnessing a housing bubble of epic proportions.

Rosenberg looks at more than just prices to also focus on the supply side, especially the construction of new housing, which he said is at an all-time high. Residential construction in Canada accounted for 9.3 per cent of GDP in 2020, 55 per cent higher than the long-run average value of six per cent. In the United States, by comparison, residential construction accounted for just 4.6 per cent of GDP, he noted.

Douglas Porter, chief economist and managing director of BMO Financial Group, wonders whether Canada will ever build enough housing to meet the insatiable desire for homeownership. If people believe housing prices only move in one direction, demand might remain high.

However, he believes that given the recessionary tardiness, the economy will welcome growth in any sector it can find, even if it’s in residential property. He said monetary policy cannot do much in the short run to address housing prices.

Calls for the government to address rapidly escalating housing prices are rising, but one should be cautious before advocating for the blunt use of macroprudential instruments. Should the federal government or one of its agencies intervene with a tool that is indiscriminately applied to all of Canada, much like the mortgage stress test, there could be unintended consequences.

CREA’s latest release reveals that the escalation in housing prices is far more pronounced in Ontario than in other provinces. Year-over-year price increases were four per cent in Calgary, 6.9 per cent in Vancouver and 18.4 per cent in Montreal.

In general, prices in the East have heated up far more than elsewhere, which suggests that should regulators be tempted to act, provincial and local governments might be better placed to devise interventions, such as a land transfer tax, sensitive to their local market circumstances.

A one-size-fits-all housing remedy might further hurt struggling markets in Alberta and Saskatchewan, where current housing prices are below their highs recorded five years ago. Murtaza Haider is a professor at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website hmbulletin.com.