Governments terrified of popping foreign-buyer housing bubble: Don Pittis
Unrelenting rise in house prices leaves governments bewildered over how to respond
There's a bidding war for government action on Canada's soaring housing market, but as fingers point to foreign buyers as a reason for escalating prices, governments at all three levels are not yet motivated to cool the market down.
Young Canadians complain home ownership is increasingly beyond their reach. Governments fear rules to put a lid on stratospheric prices — expected to show another strong increase in today's real estate data for April — could have an an economic impact far beyond the first-time buyer market.
- Tax on home flippers may be helpful, but most foreign investors are likely legitimate
- Toronto, Vancouver are creating all Canada's job growth
Efforts to tabulate exactly how much foreign money is entering the market are unlikely to be definitive. The debate over whether it is five, 14 or 66 per cent of sales, to quote some of the estimates in a recent Maclean's article, will not be easily resolved.
And that may be just the way a lot of those who benefit from the real estate market want to keep it.
Compared to the rest of the world, Canada has been living in a bubble. Ours is a huge country with a small population, so for decades Canadians have imagined it their God-given right to sprawl out over the best agricultural land surrounding our cities, offering everyone a suburban backyard and a picket fence.
The end of that seemingly endless sprawl just happened to coincide with historically low interest rates and large parts of a global population having risen from poverty to be at least as rich as Canadians. No longer the poor and hungry, many now have a healthy down payment.
The very difficult question facing municipal, provincial and federal governments is exactly how they should respond if the new data on foreign ownership shows overseas money is significantly distorting Canadian markets.
"British Columbia led the country with 3.0% growth, the best pace since 2006. Residential construction offset a downdraft in mining investment," BMO economist Robert Kavcic wrote last week. "Ontario was also strong, rising 2.5% for a second year, led by the biggest gain in construction output (residential with an assist from transportation) in 14 years."
Foreign vs. domestic demand
Even if the Canadian housing market is principally driven by domestic demand, markets that have been rising so relentlessly could be reaching a point of instability.
What governments quite rightly must be considering is what would happen if legislation to discourage foreign buyers was just enough to crack confidence and pop what so many people worry may be a property bubble.
Without a continuing influx of foreign investors, new construction would likely slow and deprive the economy of jobs. The sellers of existing homes would no longer count on a premium for their fixer-uppers.
Worst of all, those who entered the market recently would be under water. Younger people who are already spending almost everything they earn on mortgage bills would feel even poorer as falling prices swallowed up years of payments.
Not only that, a general decline in employment could lead to a vicious cycle of economic weakness.
- When foreign buyers abandon Canadian housing
- Foreign home buyers: How other countries limit money from abroad
- House prices may stay high in Canada: Here's why
In the bidding war for government attention, legislators must weigh the outrage of those priced out of the market against the fears of those whose livelihoods depend on a continued boom.
The best solution would be to meet in the middle, with rules that would help new buyers without mortgaging their economic future. But like your dream home, engineering a soft landing may be out of reach.
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More analysis by Don Pittis