HOW TO COOL TORONTO’S RED-HOT MARKET

There are 25 residential markets tracked monthly by the Canadian Real Estate Association and if you scan all of them, you might ask yourself just what is this real estate crisis that people are talking about? Nationally, the average sale price of a Canadian home during the first two months of 2017 was at a record high of $ 499,721, although prices only increased 2.2 per cent from the same period a year ago — barely above the inflation rate.

Dig into the numbers further and you’ll find that seven of those 25 markets are now witnessing pricing declines, including the once red- hot Greater Vancouver area, where the average price of a home had dropped 13.3 per cent to $ 950,185 for the first two months of 2017. In Alberta, there is no call to slow down the market. Even though Calgary prices climbed 2.6 per cent, the city is still grappling with double- digit sales declines.

The housing crisis, as some have called it, is centred in the Greater Toronto Area ( GTA) and, increasingly, in what is known as the Greater Golden Horseshoe ( GGH), the area bounded by the western end of Lake Ontario, Lake Erie to the south and Georgian Bay to the north, with a population of 9.2 million.

The Toronto Real Estate Board on Wednesday said prices climbed 33 per cent across the GTA in March from a year earlier to an average of $ 916,567, and the city seems poised to climb past Vancouver as the most expensive housing market.

“It has been encouraging to see that policymakers have not implemented any knee- jerk policies regarding the GTA housing market,” TREB president Larry Cerqua said.

But Canada Mortgage and Housing Corp. has expressed concerns about the Toronto market, specifically pointing to the contagion effect spilling into neighbouring communities.

In Hamilton- Burlington, prices were up 22.6 per cent during the first two months of 2017 from a year earlier, while Kitchener-Waterloo had a 23.5- per- cent increase. Both are a product of people fleeing Toronto looking for cheaper housing.

The critical issue for policymakers, both federal and provincial, is how to cool the GTA and the surrounding area without damaging the more delicate parts of the country where housing markets are in recovery mode.

Guy Huntington, chief executive of the Calgary Building Industry and Land Development Association, said his group has shared concerns about further lending restrictions.

“Your need to cool the market in Toronto and Vancouver is actually having a greater negative effect on the state of the country,” he said.

Nevertheless, pressure is building on provincial and municipal governments to intervene, such as British Columbia did last year when it imposed a 15- per- cent foreign buyer tax on Vancouver.

In Ontario, the debate is now at Queen’s Park, where the opposition NDP is also calling for tougher rent controls. Rental rates for the average purpose- built apartment jumped 11.6 per cent in 2016 to $ 2.77 per square foot, and larger increases are being reported in 2017.

“I think the solutions might be provincial- and city-specific now,” said Andrew Charles, chief executive of Canada Guaranty Mortgage Insurance Co., the country’s second- largest private mortgage default insurance company.

What can governments do to slow down Toronto’s housing sector without laying waste to markets in the rest of the country? Here are some ideas making the rounds:

IF WE WANT YOUNG BUYERS AND GROWING FAMILIES TO HAVE A BETTER SHOT AT HOME OWNERSHIP, WE NEED THE PROVINCIAL GOVERNMENT TO WORK IN PARTNERSHIP WITH CITIES TO CLEAR ASIDE HURDLES. — TIM HUDAK, ONTARIO REAL ESTATE ASSOCIATION THE MARKETS WITH HIGHEST RISK WOULD BE THE MARKETS WITH THE MOST INFLATED PRICES. evan s iddall, cmhc chief executive

CMHC’S CHIEF EXECUTIVE Evan Siddall has indicated he supports looking into the idea of forcing financial institutions to have more “skin in the game” when it comes to loans that default.

The banks would be forced to pay a deductible on all insured loans — much like consumers do with home insurance — that ended up in default, which would lead to increased costs that would then be passed on to consumers.

“Implementing that policy would raise the cost of capital and that would raise rates,” Alexander said. “The markets with highest risk would be the markets with the most inflated prices.”

THE DEVELOPMENT INDUSTRY has long championed looser restrictions on development as a way to improve housing affordability.

“If we want young buyers and growing families to have a better shot at home ownership, we need the provincial government to work in partnership with cities to clear aside hurdles to increasing the number of homes in the market and the choices in the marketplace,” Tim Hudak, chief executive of Ontario Real Estate Association, said after the latest GTA housing results.

Benjamin Tal, deputy chief economist at CIBC World Markets, said Ontario could immediately impact supply by signalling that it will not proceed with plans to further restrict low-density development in favour of highrise development. He said some developers have been banking land or speculating as prices continue to rise in the Toronto region.

“Sending a clear signal would release some land (developers are holding),” Tal said.

Others question whether changing rules about density and the green belt around Toronto would be fair at this point.

“Creating more access to the Green Belt to boost supply, raises moral issues,” said Finn Poschmann, chief executive of the Atlantic Provinces Economic Council. “Ontario and Toronto voters voted for the Green Belt, and people bought houses because they chose to be near it. There would be a nasty sense of reneging.”

Poschmann said a better idea would be to encourage more supply of a range of rental housing types by changing zoning rules to allow for increased density and ensuring that the property tax system becomes less discriminatory toward multi-unit rentals.

“Zoning and property tax reform are best long- term routes to building supply and keeping the market liquid and flexible,” he said.

RAISING THE OVERNIGHT lending rate just to cool one house market is not something the Bank of Canada is likely to do. But economist Alexander said higher rates might be the single biggest thing that can be done to cool the market.

“We are starting to see stronger economic growth and, if anything, economic data is coming in better than anticipated,” he said. “A strong case can be made that although financial markets aren’t expecting rates to be raised until 2018, you can make a case that Bank of Canada can take rates up to the oneper-cent mark.”

Floating or variable rates tend to track the overnight rate and the banks would likely pass any increased cost on to their customers. The small increase would most impact consumers living where housing prices are the highest as well as those who are the most stretched in terms of debt.

Through OSFI, Ottawa could also increase the capital requirements of banks, which is effectively like increasing long-term rates because financial institutions will pass on their additional costs to consumers through more expensive mortgages and loans.