It is not a broadly known fact that Canada’s Real Estate Sector, currently contributing approximately 13% to our overall economy, is the greatest single contributor to Canada’s Gross Domestic Product (GDP). Furthermore, for much of the past decade, it has contributed disproportionately to GDP growth. Historically, it is generally true that when our real estate sector is vibrant and on an upswing, Canada’s economy is healthy; the reverse also tends to be true.
We should care about this fact today. The real estate sector is exhibiting a clear weakening trend – not yet alarming, but nevertheless noteworthy.
Over the past three or four years, all levels of government – federal, provincial, and even municipal – have acted to apply the brakes to residential housing price- increases, in attempts to improve housing affordability. An even greater concern federally, has been the skyrocketing indebtedness of Canadians.
These affordability and super-charged price-increase issues manifested themselves most dramatically in the Greater Toronto and Vancouver areas, and more recently, in Greater Victoria.
The cascading series of interventions by the federal government included tougher stress tests on borrowers, more stringent income-verification, increases in the cost of mandatory high-ratio mortgage insurance, and limits on the values and types of properties to which a high-ratio mortgage could apply.
Unfortunately, the federal changes had to be applied equally to all regions of Canada, even to areas where home prices and affordability had not become significant problems. Many of these actions greatly impacted the first-time home buyer in particular – a recognized key driver of housing demand.
In tandem with federal tightening of lending regulations, the Bank of Canada, after many years of minimal rates, began raising interest rates, affecting both current and aspiring home-owners nationwide.
Provincial and municipal governments in Ontario and British Columbia applied additional, more focussed policies, particularly to larger metropolitan areas of Greater Toronto and Vancouver, where rental vacancies were near zero, rental costs skyrocketing, and housing prices seemingly on steroids. Foreign Buyers’ taxes were imposed, as were municipal “vacant home” taxes. Most recently in British Columbia, a “Speculation Tax “was introduced in selected areas of the province, including Greater Victoria, Nanaimo, and the Kelowna region. The Speculation tax would apply as an add-on tax to not only the foreign buyer (at 2%), but also to Canadian out-of-province buyers of BC residential property (at 0.5%), if the property was unoccupied for more than six months of the year, and not rented. A further twist applied a softened Speculation Tax (0.5%) on resident BC owners of a secondary property such as a cottage, applied on assessed values over $400,000, if the property were substantially vacant.
Not surprisingly, these numerous brakes on residential real estate are now showing substantial impact. In recent months, the bottom has virtually fallen out of the multi-million dollar markets in Toronto, Vancouver, and Victoria. Sales volumes have plummeted up to 50%, and prices are dropping. In the median-price range, sales have slowed and prices are softening, but not nearly as dramatically as at the upper price levels. In all price ranges, many more listings are emerging, likely leading to further price moderation.
While individually, each jurisdiction can argue that these braking actions were necessary to both re-establish a higher measure of housing affordability, and moderate the rising debt levels of Canadians, it is the cumulative effect that creates the most long-term uncertainty. The danger of overshooting well-intentioned objectives exists. Housing costs may indeed decrease further. However, if the end effect is a drastically-slowing economy, or even a recession, an improvement in housing affordability may not become the end result for the average Canadian.
To avoid the “overshoot”, governments must, should the need emerge, stand equally ready to ease up on the various braking mechanisms now in place. Unfortunately, governments are often far more reluctant to eliminate new revenue sources than they were to impose them. We can only hope to be proven wrong.
A retired corporate executive, enjoying post-retirement as an independent financial consultant, Peter Dolezal isthe author of three books, including his recent Third Edition of The Smart Canadian Wealth-Builder.