Canada

Bank of Canada Wants A Housing Bubble, While Other Central Banks Try To Pop Them

Central banks are flooding economies with cheap credit, and trying to prevent bubbles. Well, some countries are trying to prevent bubbles. Canada has decided home price inflation is an uncontrollable consequence of the environment. In fact, the country’s central bank welcomed the rapid home price growth as “needed.”

That’s not normal. Not by a long shot. Other advanced economies facing rapid home price growth are trying to stop, and even pop, housing bubbles. Here’s a quick round up of how other countries are working with their central banks to maintain a low interest rate environment that doesn’t sacrifice the young.

The Low Interest Rate Problem

Most countries are embracing accommodative monetary policy these days. This is when central banks try to grow the money supply in a downturn, to stimulate the economy. They lower interest rates, and hope businesses and households use cheap credit. Businesses ideally use the cheap capital to expand operations, and buy inventory. Households ideally use the cheap cash to consume or finance large purchases. Consumption of goods and services is how economies work.

There’s one big problem that occurs when you give everyone cheap money – you don’t know how they’ll use it. In many cases, when people don’t know what to do with the credit, they begin to speculate and bid up asset prices. The dot-com bubble, Great Recession, and now the pandemic, are recent examples. They take already cheap credit, and try to make it cheaper to prevent a recession from getting worse, often creating a crisis. 

Concentration of investors into any asset class is a problem, but it can be systemic if it’s a necessity. Residential real estate would be one of those necessities. While rising home prices can be a huge benefit to an economy, it needs to be under the right circumstances.

If home prices are rising with an economic boom, it’s good news. If home prices rise during record unemployment and low GDP growth, you have a big problem. Rapidly rising housing costs when people face fewer opportunities is less than ideal. It’s also a problem when those not impacted spend more of their income on debt service for shelter. This removes spending from the economy, making it harder to recover and slows growth. Chasing short-term growth this way can lead to a greater risk of catastrophic failure.

This is a tough problem for countries balancing short-term policy with long-term growth. Countries like Canada have opted to embrace the short-term gains, for long-term risk. Other countries aren’t so keen on seeing that happen. Instead, they’re implementing additional policies to run alongside low interest rates. Here’s what they’re doing.

France’s Central Bank Will Limit Leverage

The country that pioneered the vacancy tax, gave banks until the summer to tighten credit. The Banque de France is limiting mortgages to 25 years, and banning exceptions to anything above the 35% debt service ratio.  Lenders have also been asked to limit total debt including insurance to 33% in most cases. Banks have already begun to comply with the request, but it is expected to become a requirement by summer.

South Korea Will Target Real Estate Speculation Mercilessly

The South Korean government is tag teaming speculators with the Bank of Korea. The country is launching a dual-pronged attack, limiting debt and making speculation unprofitable. The most notable policies involve limiting mortgages, taxing speculation, and increasing property taxes. 

Mortgages in the countries’ hottest markets will be subject to new caps. Mortgage over ₩1.5 billion (US$1.3 million) will be banned in regions labeled “speculative” or “overheated.” The move is designed to reduce liquidity in the country’s hottest real estate markets. This would work to cap most home prices to the borrowing limit.

Short-term speculation will become less profitable due to increased capital gains taxes. Sellers of homes purchased less than a year before, will be hit with a 70% capital gains rate. The rate is reduced to 60% for those that sell after that, but before two years. The basic capital gains rate for housing will also have 30 points added. The idea is to treat “easy money” in housing more like regular income.  

Multiple property holders will also be subject to a hefty additional property tax. Secondary properties will have to pay an additional property tax of up to 6% of the assessed value. Regions with higher taxes tend to be more affordable, since it forces a recurring link to income. The idea is to create a similar effect, that would be limited to those with second homes.

Reserve Bank of New Zealand Adds Housing Affordability To Policy Consideration

The New Zealand Government is making an “effective” housing market a priority. The government has said it will be a priority over the next year, and is the key to creating a sustainable and inclusive economy. They took the first step by asking the Reserve Bank of New Zealand (RBNZ) to consider home prices when setting policy. 

The full details of what’s coming will be announced later this year, but the RBNZ has asked for more tools. One of the most interesting is the use of debt-to-income ratios, which will be used to limit leverage. The government didn’t mince words when they explained what they’re trying to do. The new rules “will apply only to investors,” said the deputy prime minister.

Bank of Canada Thinks It “Needs” Real Estate Price Growth

The Bank of Canada (BoC) governor, when asked about taming home prices, said “we need the growth.” The Government of Canada hasn’t mentioned home prices since the pandemic started.

That’s it. That’s the response. 

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46 Comments

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  • Ethan Wu 7 months ago

    Why hasn’t Canada considered a revision of debt service ratios?

    • Mortgage Guy 7 months ago

      I was in a group chat about housing policy, and Stephen suggested just that. Canada’s current government would never go for it. It’s an interesting policy mechanism.

      Every point you shave off of debt servicing ends up as an extra point for generalized investment or economic growth.

      • Ázat 6 months ago

        Tiff doesn’t even know if there’s a bubble out there. What would you expect from him. I would never vote for Liberals again.

  • AG 7 months ago

    I don’t know if this was a bubble or not in Canada, but this feels like capitulation. The nail in the coffin.

  • Michael Tran 7 months ago

    What’s happening up in Canada?

    You know it’s bad when a country that had the world’s biggest real estate bubble, that launched the world into the biggest recession since the Great Depression, is looking at your real estate market, and saying “what are they doing?”

    • Jason Chau 7 months ago

      They’re stuck in the immigration trap from not correcting the economy during the Great Recession.

      They lost 10 points of GDP to housing, and now it’s the economy. To make up for the 10 points lost, they need to keep bringing in people. It makes prices worse, so they have to double down. Lord help them if immigrants figure out the healthcare isn’t that good, and there aren’t many jobs other than selling households to new immigrants.

      • The Truth Shall Set You Free 6 months ago

        Exactly…the housing market is the newest Ponzi scheme. As you said, buy then wait for the next sucker to buy it off you and hope not to get stuck with the gamble you just took. Imagine buying places for a ridiculous amount when rentals are continuing to collapse and you get less than 2% ROI IF you pay cash for the home. To rent an entire home in the GTA currently is around 2200 plus utilities per month. There are many homes renting right now for this amount (and less as there is no demand since no students nor tourists meaning no AIRBNBs). Meanwhile to buy that home will cost you on average 1.1 to 1.4 million. Factor in the property tax and maintenance and you’re lucky if you see a 1/2 percent ROI. High risk for such a tiny return if you’re buying for investment and if you’re not why would you buy when you can rent for 2200 a month? The logic propping up housing to the point of where home prices are isn’t sound any longer. Might as well rent and invest the rest. You’ll be further ahead in the end vs the person who bought the home. Home prices are at an all time high. I’m 100% certain when the bubble pops that home prices will never return to these lofty peaks we see where homes that cost roughly 200 a square foot to build (meaning a 3000 square foot home only costs around 600k to build) are selling for 2-5 million. That means that you’re giving the property value a value that you would only give where you have scarcity of land. We live in a country with the largest land mass in the world. Anyone that drives outside the city can clearly see there are millions of acres of empty land still to be developed so home prices should not be as high as they are and yet they are because the government needs them to be. The moment there is a correction in this market there will be a long term depression. The housing market makes up nearly 10% of our GDP. It historically is only supposed to make up under 4%. This is a huge problem. Preparation meets opportunity. If you have cash hold onto it cause when the wheels fall off and the mortgage rates climb from nearly 0 to 4 or 5 % you’ll be able to pick up homes for less than what it cost to build them.

      • Average Man 6 months ago

        I’m increasingly anti-immigration for the immigrant’s sake. Refugees are a different thing and by all means, come on in, but economic immigrants? My God. If you’re Indian or Chinese or Filipino and able to qualify to get into Canada on the points system, you’re probably someone who’d do just as well or better staying where you are.

    • SH 7 months ago

      We currently have a federal government that puts the interests of foreign real estate speculators ahead of the interests of middle class Canadian taxpayers.

      And what’s even crazier is that Canadian Millennials, who suffer most from the current situation, absolutely love this government and will likely elect it for another term.

  • Marc 7 months ago

    Damn. South Korea going hard.

    • Jin 7 months ago

      I’m not even joking when I say K-Pop is helping young people band together, and look out for each other. They’re tired of exploitative policies. Stronger and more equatable leadership is arriving all around now.

      Canadian youth are still buying into the narrative they’re all alone, and it’s their fault for not working harder. They haven’t realized they have the power to change this, but the longer they wait to realize it, the more likely they are to turn socialist. This is a compromise Korea is willing to make, to save it from socialism.

      • Brittany 7 months ago

        I think part of the issue is that the young people in Canada seem to think that capitalism *is* the problem, rather than recognizing that our government intervention is what caused the bubble and continues to inflate it. They have people very much convinced that they know the problem and that problem is capitalism… Trying to explain free markets to these types of people is impossible and sadly these are the most vocal participants here. Financial literacy is needed, but so is the ability to communicate to people with opposing views and that honestly seems impossible these days.

        • SH 7 months ago

          I don’t even know what to say to people who think capitalism is the problem. It’s very difficult to correct such extreme ignorance of basic terminology.

          The fact that our real estate market is now centrally planned (Soviet-style) should be sufficient enough to clue them into the fact that capitalism has nothing to do with it.

          • VDTD295 6 months ago

            Our real estate market is centrally planned – Soviet Style? LMAO!

            Yes, it is so soviet styled, that it allows mass speculation of housing (a basic need), encouragement of all migrants to take on decades worth of debt so they can continue to inflate fictitious capital, and a declining investment in subsidized housing.

            Unlike, actual countries that use subsidized housing (Singapore, Japan, Austria), where paying more than 20-30% for housing is completely unheard of.

            Yes, I am sure this century long trend of generations being priced out of wealth, which can be seen in every capitalist nation, has absolutely nothing to do with capitalism whatsoever LMAO!

          • SH 6 months ago

            Privatizing profits and socializing losses – which is the system currently in place in Canada and particularly in housing – is NOT capitalism.

            It’s “crony capitalism”, perhaps. But in true capitalism, people and businesses are not prevented from failing by government supports.

            Don’t blame capitalism for politicians distorting it.

            Personally I’d like to see income taxes slashed and property taxes raised 300%. Reward WORK rather than speculation. No massive government schemes required, just shift the incentives. That would be sufficient to pop the bubble and keep housing stable for the future.

      • Paul 7 months ago

        Socialism? What are you talking about?

        • Neo 7 months ago

          UBI which the Liberals have already tabled last week.

        • SH 7 months ago

          What would you call transfering risk from the banks to the taxpayer (CMHC)?

          • The Truth Shall Set You Free 6 months ago

            CMHC only insures homes under 1 million. Any home that sells over a million requires 20% down and is a problem for the banks if the borrower can’t pay. Or is supposed to be…from what I understand the BoC is still taking bad debt off the banks to ensure they have liquidity (which is tax payers again). The moment this stops is the moment home prices fall down and right now in the midst of a depression where people are only working due to tax payers footing the bill through social programs like CRB and Rent and Wage subsidies. These are going to end soon enough though.

          • Average Man 6 months ago

            It’s socialism for corporations, rugged individualism for citizens. Cool.

      • They're lying to you 6 months ago

        Practically all nations are socialist to some degree including the U.S. with most nations incorporating capitalists ideals. True capitalism puts the means of production into the hands of individuals with 0 government interference which practically exists nowhere this day and age. The problem with Canada is in fact a socialist concern in the sense that it is the government that has interfered in what is supposed to be a fair and free market to create and extend asset bubbles by manipulated interest rates, printed money and buying back bonds. If they had stayed out of this we would have had our crash years ago a wouldn’t be in this mess right now. Instead we massive asset inflation everywhere, stagnant wages, massive debt, and no real growth. What a disaster waiting to happen

  • Aemar 7 months ago

    These governments have proven to not care!!! All they care about is publicity and so they can be relected again! The living wage in Ontario is $22, before COvid, and minimum wage is $14.25…. their policies are making the rich richer and the poor poorer!

    • Ian Brown 7 months ago

      The government uses a very broad measure of inflation, that includes many components that don’t apply to people significantly.

      Now that they aren’t seeing inflation because retail prices are down (you literally can’t shop), they are TRYING to raise the cost of living through housing. Higher housing costs mean higher wages are needed and, they consider this a good thing.

      They don’t understand they never measured inflation correctly in the first place.

      • Crazy Government 6 months ago

        I thought they don’t consider housing costs when calculating inflation (which makes absolutely no sense)…

    • Brittany 7 months ago

      You are absolutely right, everyone *feels* the pain but no one seems to be educated enough to recognize that this pain is being perpetrated by the government, which is a bit of a predicament when the only solutions they propose is for more government… I honestly don’t know what can be done!

  • straw walker 7 months ago

    Canada only has one game in town..
    Real estate flipping..

    • Sure 7 months ago

      Why don’t they follow another country as an example. No justification for 30 percent price increases during pandemic shutdown

  • lorraine st james 7 months ago

    More then one game in town, Canada has unaffordable real-estate, and natural resources, Lumber, oil, water.

    • Jake 7 months ago

      In Canada, to be regarded as “successful”, one has to own a house.
      The government has actively remained hands off the real estate market which has now reached a ” super bubble ” level.
      Going forward, no young person will be able to purchase a home.
      This means that without owning a home, the next generation will all FAIL to become successful.
      This means that the next generation will all be regarded as a bunch of losers.
      Well, the next generation will also be running the country. So this means that by the next generation Canada will be run by a bunch of losers.

      Personally I think that Canada HAS been run by a bunch of losers for quite some time now.

      They see fit to intervene and control the egg market, the chicken market, the milk market, etc etc …….

      BUT they want to be a “wanna be” capitalist country and let the housing market control itself.

      What a bunch of losers.

      Imagine this –
      Average House price in Niagara Canada is about $500 000.
      Average house price 1 km away in Niagara USA is $50 000.
      The job market is the same in both areas
      The services are the same
      The safety is the same

      Something SMELLS in Canada

      • The Truth Shall Set You Free 6 months ago

        Even just outside major cities in the US where weather is incredible home prices are in the mid 200,000s (look at Texas and Florida). They even have no state income tax. Sure you have to pay for private insurance but when you factor in how over taxed we are in this country where for every dollar earned take home is roughly 35 cents paying for private insurance where you get things done instantly vs waiting like we do here in Canada for certain procedures you’re further off living there vs here. I personally know a few people who work here but live across the border on account of how cheap home prices are there. Not just in Niagara but also in Windsor as well.

      • SH 6 months ago

        The government has most certainly not remained hands off. LOL. Are you kidding me?

        The government and Bank of Canada (not much difference these days) have CREATED this bubble:
        – CMHC (government corp) transfers mortgage lending risk from banks to the taxpayers (moral hazard on overdrive)
        – BoC bond purchases rig the bond market to artificially suppress rates
        – shared equity scheme (government is now actively speculating in real estate with taxpayer money)
        – preferential tax treatment for one type of investment (homeownership) versus another (renting and investment in financial markets); flippers exploit this with little consequence by the CRA
        – mortgage deferrals to deadbeats imposed by the government onto the banks (what did renters get? zilch)
        – mass immigration without proportionate investment in housing and infrastructure
        – shady dealings between developers, realtors, foreign interests and governments (British Columbia)
        – property tax deferrals to Boomers (BC again), with Millennial workers forced to make up the shortfall through increased income tax
        – artificially low property taxes in most major cities; Canadian governments heavily tax productive work and only lightly tax speculation

        I could go on but hopefully the point is made. If government were truly “hands off”, prices would be 50-80% lower than they are today.

        There is one area where the government has indeed remained hands off : enforcement of money laundering laws.

        • Crazy government 6 months ago

          Thank you for echoing my thoughts. Our government has orchestrated this bubble, despite trying to claim otherwise.

        • Average Man 6 months ago

          The easiest answer is to get rid of the Boomers. Next time you see mum and dad, Millennials, make sure to poison them a little.

          (I’m joking.)

          (Am I?)

          • Kathleen 6 months ago

            May as well poison everyone (including millenials) who got into the housing market 2-10 years ago, because the prices have increased like crazy over the last ten years for ALL HOMEOWNERS (not just for those Boomers who are home owners. BTW not all Boomers are home owners). In other words, lets not make this an attack against all people of a certain age who had nothing to do with making the policy decisions (BOC and Canadian government).

  • Westsider 7 months ago

    There is no plan in Canada. No investment in Manufacturing or sustainable energy or anything except house flipping, and they keep stoking FOMO. This might not end well.

  • Nick 7 months ago

    I believe the attitude propagated in this article is the well-camouflaged cause of the modern housing gambling mania. Under no circumstances do growing house prices constitute a good thing. It’s like saying that higher medication prices, or clean water prices, are great.

    When people, worldwide and decade-long, dump a huge part of their life’s earnings into rotting wooden boxes, the only intrinsic utility of which is to provide shelter, it robs the economy of grassroots investment and innovation. Every additional dollar invested in housing is one dollar taken away from productive economy. In effect, housing speculation transfers the ownership of the economy from many individual citizens to very few bank owners.

  • southseacompany 7 months ago

    Because, unlike other nations where wealth can still be created by producing a good or providing a service, Canada has become an asset-based economy – utterly dependent on inflating real estate values to create wealth.

    • Sam 6 months ago

      One hit wonders…..no more oil and gas?….what next?….oooooohhhh, look at our Housing?…..let’s milk this for all it’s worth….

  • Nick 6 months ago

    So many ways to word this. My biggest reward for a lifetime of hard work is that I didn’t have to sleep in the street. Banks end up owning everything and I end up with a mechanic’s special, bound to drain my retirement income by the time I’ve spent the best part of my life paying it off.

  • Jeff 6 months ago

    Lost in the discussion about “slap an X% tax on investment properties” is that the whole point of policies was supposed to be to encourage “affordable housing”.

    Rental properties are, by definition, investment properties – so something is wrong with this approach.

    A more productive approach would be the strongly incentivize investment in rental properties. In a country with a housing crisis, we should be providing the largest tax incentives to landlords – not exempting primary residences from capital gains. This would encourage investment capital to be invested in to rental stock and help stabilize our crumbling, unaffordable economy.

    Why is the most tax advantaged income category in our country “eligible dividends”, which flow primarily from our largest corporations (principally the banking, telecom and food cartels)? Oh right, pull the string and find the banks on the other end of almost every policy.

    Moreover, why is rental income taxed at the highest tax rate when we have a housing affordability crisis? That makes no sense, if anyone actually cared about housing affordability. We should be encouraging people to become landlords, instead we have put up almost every obstacle possible to ensure there is no rental stock. Now why would we do that? Oh right, to ensure as many Canadians as possible can be 25 year mortgage debt slaves for Canadian banks. This is not about housing, it is about banking.

    If we want to discourage speculation in buy and hold (and leave empty) “investment” in Canadian property, which is often geared around taking advantage of the 0% tax paid on primary residence capital gains – we should tax primary residence sales and we should shift the tax incentives to real rental property income.

    Rental property income, by definition, has a tenant on the end of it. That is a productive and useful asset for society. Instead, in Canada, you’re looked down upon if you’re *sniffs nose* “…a renter”. Now who does that benefit again, oh right…

    Don’t listen to what the politicians say – look at what they do and who it serves. And vote them out.

    • AA 6 months ago

      Thanks Jeff for a common sense comment. Such a rare thing on this site.

      “Kick the RE investor” policies will reduce the investor demand, which is part of the overall demand. The developers will respond with reduction in supply and not reduction in price (price drops are restricted by the ever increasing land & construction costs). The result – even tighter housing supply for the growing population in the mid-term future. Prices and rents are even further up! How’s it going to help affordability?

      Go ahead, kick the investor – the existing RE owners, as the beneficiaries of the outcome, will love you for that…

      • SH 6 months ago

        As a general rule, whatever landlords want, chances are it isn’t good for society.

        There was a 26-year period without any new rent control in Toronto. Existing rent control only applied to buildings built prior to 1991. This was not amended until 2017. Where was all the new construction in order to bring supply in balance with demand?

        Much of the new construction, instead of going to Canadian end-users or rentals, went into the pockets of foreign money-launderers who left the units empty.

        Land and construction costs are not fixed in place. They can, and do, go down. They are artificially propped up right now just like everything else in this market.

    • Say what? 6 months ago

      Yeah… I’m going to have to respectfully disagree with you. I’ve got zero qualms about governments imposing taxes / increasing income tax for rentals. If you’re rich enough to purchase multiple properties and become a landlord, you can factor this in. Hopefully it’s too expensive for the landlord to keep, thus freeing the unit up to the market so that renter can finally buy their own home and become an owner instead.

      Tax owners of multiple properties.
      Tax income from rentals similar to regular income.

  • Fred Rankel 6 months ago

    I just want to say how good it is to see all the comments. Very well presented by so many people. Very educational and informative to see different thoughts and opinions. One thing for sure. This market will not end well.

  • Phardoogus Maclinsky 6 months ago

    Extend CERB for another 2 years

Comments are closed.