Canadian real estate prices are once again the focus of an international agency. An IMF annual staff audit cites home prices as one of the biggest threats to the country’s economy. The agency suggests avoiding tax deductions and subsidies, which will compound the country’s rising inequality. They also recommend mitigating leverage build up, and taxing speculators — similar to how Canada targeted foreign buyers.
Canadian House Price Correction A Top Risk For Economy
One of the top risks for the country is home prices, warns the international agency. The IMF is concerned a turn in the pandemic, or interest rate normalization, can destabilize housing markets. The agency warned of interest normalization during the foreign buyer “mini-bubble” in 2017. Soaring debt and home prices have since become a national issue, as the BoC uses housing to drive an economic recovery.
One suggested solution is to ensure adequate loss buffers. In addition, provide “emergency liquidity as needed.” Lastly, to “loosen policy if credit falls significantly.” They probably should have elaborated on “significantly,” since Canada is credit trigger happy.
Canada Is Experiencing Rising Inequality — Subsidies and Tax Deductions Will Make It Worse
Canada has been experiencing rising inequality, and it’s going to get worse. The agency bluntly states, “the crisis will also exacerbate wealth differences between asset-rich and asset-poor households.” After all, if you’re inflating the price of assets, those without them suffer from an even larger gap. Those with fewer assets will not gain nearly as much as those with many assets.
Canada’s solution in the past has been subsidies and tax deductions — and it hasn’t really worked before. That’s because it’s the exact thing experts warn against doing. The agency basically subs Canada’s strategy, by stating “well-intended measures — like direct subsidies and tax deductions — can have perverse effects on housing affordability by favoriting those that can already afford to buy a house at the longer term-disadvantage of those that cannot, thus worsening existing inequalities.”
Canada Should Tighten Lending, Remove Financial Supports
The IMF also recommends Canadian banks start becoming more prudent with lending. “Banks should be encouraged to lend under prudent conditions and be forward-looking concerning their pricing,” suggests the agency. They further, “mortgage contract parameters should be set such that borrowers can cover higher interest payments in the future.”
Canada’s federally regulated banks already test borrowers for the ability to handle higher rates. One assumes this means they would like to see more broad testing, or not to loosen the current measures. Ultimately, measures should be taken to “mitigate a system-wide buildup of leverage.”
IMF Recommends Canada Tax Real Estate Speculators
One somewhat unexpected recommendation from the agency is implementing demand cooling measures. The country addressed the foreign buying “mini bubble,” in 2017. However, that segment of speculator is no longer the broad issue seen across the country. Now domestic speculators, who were given the home-field advantage, have taken over unchallenged.
The staff suggests, “provincial and municipal real estate taxes on non-residents could be eliminated or harmonized into broad-based tax measures targeted at speculative activity more generally.”
The market inevitably may get new cooling measures, but they won’t get them in the near term. BMO recently said they don’t see the ability to implement them before the Spring market. At this point, fast rising home prices are unlikely to be challenged. Some economists believe this will result in a textbook bubble — making it more dangerous to cool.
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