Canada’s Overheated Real Estate Market Threatens To Destabilize The Economy: RBC

Canada’s largest bank warned the country’s real estate markets are approaching systemic risk. Not credit risk, banks are more than adequately protected. Instead they see it as a risk for the whole darn economy. RBC senior economist Robert Hogue, who isn’t a traditional bear, warned the market is out of control.

Canada’s nurturing of the housing bubble created buyers that don’t see risk. Instead, they now firmly believe policy will be used to prevent prices from ever falling. This has created a once-in-a-generation build up of moral hazard, now threatening the whole economy. All for 400 sqft condos, eh? Spicy. Let’s dive into his recent statements. 

Canadian Real Estate Markets “Threaten To Destabilize” The Economy

Hogue didn’t hold back, warning “overheated markets threaten to destabilize the economy down the road if or when a correction occurs, with possible heavy costs for governments. The threat is particularly potent because excessively high price expectations are widespread. Canada hasn’t had a market overheating of this scope since the late 1980s.” 

The statement echoes an increasingly popular sentiment — people see no market risk. The only risk they see is not making sweet gains, and having to buy at higher prices. It’s a dangerous game when the average person starts thinking their teardown bungalow is too big to fail. Homeowners think the Government is powerless to their master investment strategy.

Canada Is Increasingly Diverting Capital From Productive Investment

The economist believes this exacerbates a related issue — the misallocation of capital. “Capital used to inflate real estate values isn’t going to more productive purposes in our economy. The misallocation of capital undermines longer-term growth prospects.” 

The two issues compound into a very dangerous one — people aren’t just overpaying for housing. They’re diverting money from “productive investment.” That’s a term you’re going to hear a lot soon, meaning one that has productive value such as increasing output. This is opposed to a non-productive investment, that only appreciates due to scarcity. Think diamonds, and Milli Vanilli trading cards.

The lack of productive investment means people are concentrated in a single area. This reduces general economic growth, compounding the risk. If there’s failure in that single area, there isn’t much of an economy to bail it out.

Canada Backstopping Real Estate Prices Will Lead To More Inequality

Hogue also warns of the risk of rising inequality from backstopping the market. “Sky-high property values can exacerbate inequality, widening the divide between haves and have-not,” warns the country’s largest bank. “Exorbitant land prices make it more expensive to build more affordable housing.”

If home prices rise more than the median income of households per year, those that don’t own are locked out. By backstopping markets, those with property receive the benefits of the moral hazard.

This isn’t just problematic for bleeding hearts worried about renters. Young adults drive economic growth, with the highest level of consumption. They are the driver of the economy from the lowest level. If they’re locked out of the market, they move. If enough of them do and take the economy with them, it causes long-term failure of cities. This is a problem more commonly seen in developing nations, than advanced economies. Yet here Canada stands.

Canada’s strategy to help first-time buyers has mostly focused on toxic leverage. Extending mortgage lengths, second state mortgages, and lowering down payments are examples. They’ve also used developer subsidies to add middle class supply at non-market rates.

Let’s assume this is well intended, but address how bad of an idea it has been. This reinforces a higher price floor, creating even more moral hazard. Prices don’t need to fall, the government will top people up, pushing them higher. Earlier this week, the IMF suggested Canada should stop this for the same reason Hogue is suggesting — inequality.

Okay, Bob — What’s The Fix? 

The economist suggests, “policymakers should look at a range of options to discourage speculative activity as this could generate further volatility.” He cites New Zealand’s approach to phasing-out mortgage interest tax deduction, to be “interesting.” 

“Policymakers should put everything on the table, including sacred cows like the principal residence exemption from capital gains tax,” he suggests. Most likely causing everyone in the real estate industry’s blood to boil. “These considerations will be complex, controversial and no doubt fraught with unintended side-effects.” 

“Policymakers should put everything on the table, including sacred cows like the principal residence exemption from capital gains tax”

Robert Hogue, RBC Economist

Many policies, like capital gains exemptions, were designed when interest rates actually increased. RBC believes “policy support for homeownership needs to be recalibrated,” for the Bank of Canada’s commitment to keeping interest rates low for an extended period of time.   

Currently, “many Canadians believe the policy environment guarantees property values will rise indefinitely.” The bank suggests, “governments should take a broader look at the support they provide to home ownership, and the degree to which it contributes to extrapolative price expectations.” 

Less eloquently explained, they are suggesting Canada adopts prison rules. Demonstrate to households that risk still exists, so other people stop f*cking around. They also suggest more strict stress tests, raising minimum down payments, and lowering the cap on refinancing. All things you would never imagine a bank suggesting, but they just did.

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  • Ahmed 3 years ago

    RIP Rob’s inbox. Don’t ever mention the sacred cow. Canadians act like taxing their home at non-subsidized rates is calling their mom ugly.

    • Doomcouver 3 years ago

      Sadly with the number of tax-cheats in Canada this is the most egalitarian way to do it. Tons of people fraudulently claim the primary residence exemption as it is. You’re going to have to tax it the same as any other investment. Capital gains is already subsidized anyways so homeowners will just need to suck it up.

  • Trader Jim 3 years ago

    Someone’s gotta pay for all of the corporate handouts. Why did I know it was going to be me? LOL

    The nutty part is if they did this in 2017, it would’t be that much of an issue. Toronto and Vancouver would be impacted, and the rest of the country would be fine. Instead they waited until everyone diverted money from productive investment, and then need to figure out how to change that.

    • Doomcouver 3 years ago

      Knowing how government operates they’ll be putting in the curbs right after the market is already collapsing. They’re habitually late to the party.

  • John lavin 3 years ago

    A capital gains tax on principal a residence will only go into a big government black hole of non productivity.
    Eliminate capital gains on all assets then that money will go to productive ventures instead of disappearing into the corrupt and wasted bloat of government.
    Stop creating currency out of thin air then you will see housing prices come down.
    Eliminate low or no money down , 25% down payment should be the norm…………you don’t save the down payment you don’t get the house………..tough shit.

  • Unkle Krunkle 3 years ago

    When investors are buying up New Brunswick real estate, you know things are crazy.

  • SH 3 years ago

    If the government’s sole duty is to prop up the unearned gains of mostly Boomer homeowners and landlords, then the principal residence must be abolished and homeowners forced to contribute to national coffers.

    If real estate in Canada were a free market (no subsidies, no CMHC, no QE, no shared equity scheme, no mortgage deferrals, proper anti-money laundering laws in accordance with other Western countries), I would be fine with maintaining the PR exemption. But as long as our government is determined to boost the assets of the generation that already had everything handed to it on a silver platter, it is perfectly fair to claw back some of those artificial gains.

    And no, homeownership costs should not be deductible. The government artificially boosting their investment value has more than offset any such costs.

    • Doomcouver 3 years ago

      Massive wealth taxes are on the horizon. Trudeau’s reckless spending is only the first phase. Soon he’ll be ramping up austerity on homeowners and the wealthy to pay for it.

      I think anyone who’s gotten rich off real estate in Canada should be looking at leaving the country. You’re not going to want to stick around in Canada to see what’s coming next.

  • Erik 3 years ago

    I just flipped my 600 sq ft condo and bought three 300 sq ft condos for over asking… One of them even has a mini balcony and a parking garage for an electric scooter!!! Living the dream on credit!!!!

  • Simon 3 years ago

    Does Canada know how to do anything else other than real estate and resource extraction?

    • Daniel 3 years ago


    • SH 3 years ago

      Canada still knows how to do resource extraction? Not at all.

      Pipelines languish or blocked entirely as US-based eco-activists (likely financed by the US shale industry) have prevented any new resource development. Alberta won’t have the revenue to support the rest of the country the way it did from the late 1980s through to 2015.

      Real estate is now the only game in town. Canada has no other competitive industries.

    • Mike from Canmore 3 years ago


      • JEFF13 3 years ago

        We used to…We had some successes in tech with Nortel and Blackberry…but aggressive competitors got ahead of us.
        Even in aerospace, and despite being poor management, Bombardier (and its predecessors DeHavilland ) had some technical successes with their CRJ regional jets and the DHC family (i.e. Twin Otter). Nowadays, we have become lazy and complacent…convinced that nothing bad can happen to us.

  • Leftover 3 years ago

    1. Don’t obsess over capital gains, tax all secondary properties as regular income;
    2. Get CMHC out of the insurance game. Taxpayers shouldn’t be on the hook for leverage; and
    3. Restructure the real estate industry. Make all data publicly available and outlaw blind auctions

    Starting points.

    The only votes lost would be from realtors, so who cares.

  • Onslaught 3 years ago

    Don’t worry gentlemen my 2000s -era textbook tells me that neoliberalism and Financialization will bring about insane levels of prosperity for the populous.

    It can’t possibly be producing asset bubbles where there’s no productivity! That’s impossible.

    What a sh*t show this is. A “first world” country and we have no high-value industrial base, shit wage growth, no innovation, and the only thing we have to offer the world is cheap housing for those wishing to wash their money or wealthy foreigners. That, or flipping homes with leverage.

    As a young person, looking at this is not inspiring in the slightest. The last 50 years of policy have produced low value jobs jobs, hollowed out the middle class and produced a nouveau oligarchy.

    The job of the future in Canada is an Uber driver and a gig worker.

    At least the masses have Netflix and cheap consumer content tech though, right?

    • Bob Walter 3 years ago

      Just to be clear, Neoliberalism or austrian economics did not cause the bubble.
      Central banking and central planning did. Misallocation of capital.

      In the US the prices of housing from 1900 to 2000 were pretty much flat. Only when central banking started to interfere in 2000’s real estate become a speculative asset.

  • Mike from Canmore 3 years ago

    “Homeowners think the Government is powerless to their master investment strategy.” I don’t think this is accurate. I think home owners and the public in general think that its’ one of 1) The government is beholden to them and will never let prices collapse for fear of losing an election. 2) They think they have found a loop hole and are geniuses for exploiting it. i.e. CAN’T LOSE! I’M ALL IN!

    Whether they are right or wrong, or whether this time is really different, history will tell.

  • Holton 3 years ago

    Guys if the pandemic and lockdown didn’t drop real estate prices what will?

    The government should have let real estate prices drop during the pandemic. Now its too late, if they crash real estate now there will be no recovery.

    • RainCity Ryan 3 years ago

      Prices didn’t drop because of unprecedented levels of support from the government.

      This can continue so long as it’s not out of line with the rest of the world.
      Look at when inflation has occurred it’s almost always when a government is printing more money than their neighbours.
      Since the whole world was locked down, and EVERY major central bank (BOE, BOJ, CCB, FED, ECB) was easing and buying bonds etc etc it wasn’t out of line for BoC to do the same.

      Now the rubber meets the road when other governments are planning to use their fiscal capacity for major infrastructure spending (productive investment) but we get to try and keep our housing from collapsing.

      Will prices drop? (shrug)
      Is it better that they stay high and we wait for fundamentals to slowly catch-up or that the bubble pops and we reset? Kinda like trying to climb a ladder either with a massive weight tied to your waist, or after falling off said ladder.

      • Ashley 3 years ago

        Good analogy, seems Canada may fall down the ladder with weights tied to their waist. Such a waste of new printed money, so much liquidity but youth unemployment still at 20%.

  • Jeff 3 years ago

    I am in the market for my first place.

    Prices are up 100k in only a few months. Stings but i have watched the fed protect the housing market over all other markets and made the bonfire i see today. Well ok. I will buy an over prices home for way more then it is worth. That is the way things are and if i loose my job or if the economy tanks I will play the victim card. That is the way it goes. I didnt make the rules, but it is time i played the game. I am sick of seeing home owner make piles of cash and easy retirements while i work for decades to make a down payment. I just want a family home.

  • P Wood 3 years ago

    Isn’t the issue at the moment really supply? Slap on capital gains tax, and watch folks take their homes off the market, or ask even exihobinatly more to price-in potential tax payments (much in the same way the GST was supposed to make everything less expensive…?). The issue in Canada is capacity, and the lack of local government controls on new residential development. It would be great if Canada acted more like Japan, and instituted national support and control over new housing construction. Building more supply is really the only solution to controlling costs.

  • Ashley 3 years ago

    Finance minister is saying she is watching housing market very very closely, very carefully. Funny enough everybody is watching – federal govt, BoC, banks but paralyzed to act. Anyways damage has been done and can’t be repaired without a trade-off which none of the watching parties would agree to.

  • MoYoM 3 years ago

    Came to Canada for PhD study in 2013. Was dreaming a house owner in Canada and doing some interesting research in this developed country and realize self-worth. Then, found no research job in Canada after PhD graduation and now can’t afford a house. The dream is smashed and when people still think Canada is a developed country with a good government system, I would ask them to think again.

  • JF 3 years ago

    Re: 25% down guy —
    Boomers etc. are so quick to criticize anyone who would threaten their foolhardy “investment strategy” for retirement (“Own/monopolize all the property in the country that people need to live in!!”), and quickly forget how they got their first home/mortgage.

    I’m an aspiring home-owner. 39y/o. There are no “zero down” mortgages, and haven’t been for years. You’re “outta’ touch”. 5% down is already a challenge, and also what you (and likely 95% of boomers) put down for their first home. Easy to tighten rules for young people when you’re already sitting pretty.

    And no, the issue is not damned supply, people. Look at Vancouver with its 3/4 sitting-empty investment condos down in Coal Harbour, or elsewhere. The issues bigger than that. Supply needs to be considered, as do many other things (foreign and domestic “investment” in a need as basic as housing being one of the biggest ones).

    • john lavin 3 years ago

      Re JF the SPINELESS guy,
      I am assuming the 25% remark was directed at me and since you have my full name displayed why don’t you have the balls to display yours.
      But I can again only assume from your “boomer” remark you are just interested in injustice collecting.
      So let me address some of your assumptions for which you have no knowledge or proof.
      First of all ……..yes I am a boomer and I purchased my first house which was just as difficult if not more so back then with 2 other friends. We shared the house until we could sell it for a NON taxable profit. My second house was a triplex where I was able to use the rent from 2 other units to help pay the mortgage. Something you may not know about the privileged boomers is that we were stuck with sky high mortgage interest…………… my case I remember having a 17% mortgage at one point in time. In both of those instances my down payment was 25% which I saved, again not an easy task.
      And yes you can get a NO money or zero down payment mortgage. You’re so damned smart I am going to leave it you to discover how,
      I am no big fan of the boomers by the way, a good many of them are the most stupid people on the planet who have been lied to and cheated by socialist politicians and they still do not realize they have been hoodwinked. They have voted themselves benefits and priveleges which have never been affordable. Some but not all of subsequent generations seem to be following in their footsteps wanting the holy grail of government to look after and supply their every need.
      Grow some balls and stand on your own 2 feet!

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