New government housing policy should focus on foreign investment, speculation: BMO

Warnings of dangerous overheating in Vancouver and Toronto’s real estate markets are mounting, but home prices in those two cities are unlikely to decelerate on their own anytime soon, according to a BMO analysis released June 15.

BMO economists Doug Porter and Robert Kavcic concluded that any new government policies to cool down the housing market should be directed towards reigning in “foreign investment, speculation and land restrictions, in that order.”

Porter and Kavcic pinpoint several factors behind nosebleed-level price accelerations concentrated in those two Canadian cities. A demographic surge of young people aged 25-40 (prime homebuying years) combined with the reluctance of baby boomers to downsize means there is a lot of pressure being placed on the detached home market.

They also point out that all of Canada’s net job growth over the past year has occurred in Vancouver and Toronto, and the “urbanization” trend — urban service jobs will increase, while resource and manufacturing jobs have decreased — will continue to attract workers to cities.

Demand from foreign buyers is also playing a significant role in these two markets, and is also beginning to play a role in Montreal.

“While many downplay this factor ('it’s only X% of the buyers!'), Economics 101 will tell you that the marginal buyer sets the price; and, if you introduce a wave of new buyers on an already tight market, prices will soon reach for the sky as the demand curve shifts even slightly to the right,” Porter and Kavcic write.

“Excess global savings sloshing around have driven many asset prices rocketing higher in recent years — bonds, commercial real estate, infrastructure, private equity, residential real estate in Manhattan and London — and now that wave has washed upon Canada’s biggest cities.”

Both Vancouver and Toronto are now showing signs that speculation is in play: Porter and Kavcic find evidence of speculative behaviour in the increase in number of Vancouver properties being bought and sold within 12 months, and the recent steep increase in condo prices.

The two economists said policy makers should focus on foreign buyers who seek to use real estate as a safe haven, rather than wealthy landed immigrants. Recent policy moves to increase how much homebuyers need to put towards their down payments have focused on domestic buyers; those measures will “simply crowd out the domestic buyer and leave the field wider open for foreign capital inflows.”

The real estate industry and B.C. government have long emphasized supply problems as the main driver of price increases, especially in Vancouver which has a limited land base because of its location between mountains and water. That’s true when it comes to single family homes, say Porter and Kavcic, because a drive towards density in both cities has made detached homes “a highly-coveted relic of the past.” However, the economists call total homebuilding activity in both cities “relatively healthy.”

The federal government has promised to do a "deep dive" to look into Canada's overheated housing markets.