Canadian Housing Market Looking Bubbly, OECD
Low interest rates have created a housing bubble in the Canadian real estate market, pushing the country’s financial system to the breaking point.
At least that’s according to the Organisation for Economic Co-operation and Development (OECD). In a report published Wednesday, the group joined the growing collection of experts warning about excesses in the Canadian real estate market.
“Very low borrowing rates have encouraged household credit growth and underpinned rapidly rising housing prices, particularly in Vancouver and Toronto, which together are a third of the Canadian housing market,” the Paris-based group wrote in its 2016 economic outlook report. “In relation to household incomes, both house prices and household debt are high. Macro-prudential measures have been strengthened recently but should be tightened further and targeted regionally.” (Source: “Hose down Toronto and Vancouver housing markets, OECD urges,” The Globe and Mail, June 1, 2016.)
The group highlighted excesses in the Vancouver and Toronto housing markets, where prices have soared 41% and 45%, respectively, over the past five years. The fallout from those bubbles popping, the OECD says, would be felt far beyond the housing market.
“The main domestic downside risk is a disorderly housing market correction, particularly in the high-price Toronto and Vancouver markets,” reads an excerpt from the report. “This would damp residential investment and private consumption, and could threaten financial stability.” (Source: Ibid.)
The call to tighten regulations could force the Canadian government to clamp down further on the real estate industry. In February, the federal government raised down payment requirements on houses worth more than $500,000. Officials say they are monitoring the situation and may take more action if needed.
“We have taken steps to address the pockets of risk in markets like Vancouver and Toronto and we will continue to monitor the situation carefully,” Annie Donolo, press secretary for the Office of the Minister of Finance, told Business News Network in an e-mail statement. (Source: “The OECD urges Ottawa to tame Canada’s runaway housing markets,” Business News Network, June 1, 2016.)
“In addition to increasing minimum down payments for insured mortgages over $500,000, we have allocated funding to Statistics Canada to gather data on the activity of foreign investors, and are prepared to take further action if required,” Donolo added. (Source: Ibid.)
Exactly what those actions would be is still unclear. Some experts have proposed introducing a capital gains tax on foreign investors or raising fees on house flipping. Other economists have proposed restricting foreign investors to new developments, similar to rules in Australia.
Regardless, calls from the OECD and other industry experts could further push the federal government to tighten regulations on Canada’s bubbly housing market.