This Week’s Top Stories: Bank of Canada Blamed For Property Bubble, and QE Cannot Stop Prices From Falling

Time for your cheat sheet on this week’s most important stories. 

Canadian Real Estate 

A Large Canadian Bank Just Blamed The Bank Of Canada For The Property Bubble

One of Canada’s largest banks attributed the country’s frothy real estate market to the central bank. BMO wrote, “a surge in demand started by the pandemic, but now set ablaze by the promise of low-for-very-long interest rates.” The statement is an indirect reference to the promise made by the BoC to households. BMO, along with other banks, said low rates led to higher activity. However, the moral hazard created by the BoC’s words created a FOMO-drive frenzy.

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How Quantitative Ease Inflates Real Estate Prices, And Why It Doesn’t Work Forever

Quantitative ease (QE) is increasingly being used as a reason home prices can never fall. Not by bankers, but households are increasingly citing it. If home prices do begin to fall, the central bank could just inflate them with QE. This has helped to launch a new level of exuberance, backed by the feeling homes can only rise in price.

Unfortunately, that’s not how things work. While QE can help to extend the inefficiency of a frothy market, it doesn’t work forever. The only market we have long-term experience attempting to do so, is Japan. The country’s young people increasingly became economically insecure and led to more people failing to even attempt to live a productive life. Failure to launch became a standard way of living. As for home prices? They fell anyway. By attempting to save home prices, they sacrificed a generation of young people. In the end, the impact on home prices became systemic, failing both young adults and the market.

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Lack Of Supply Driving Canadian Real Estate Prices Higher? “Puhleeze”, Says BMO

Canadian real estate price growth is often attributed to a shortage of supply, but not this time. BMO, one of the country’s biggest banks, says new listings are at a record high in Greater Toronto. Instead, they blame the central bank’s for triggering FOMO. In a FOMO, or exuberant, driven market, it doesn’t matter how much supply there is. The market takes it out at any level because the only perceived risk is owning too little real estate.

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Mortgage Changes May Accelerate Canadian Property Bubble, Not Helpful: Big Six Banks

OSFI, the Canadian bank regulator, is revising the uninsured mortgage stress test. The changes would see the maximum amount of leverage home buyers can carry fall by 4.5% when implemented. BMO and the National Bank of Canada (NBC) said it’s a step in the right direction, but the impact will be minimal. Independently, they both said more measures will be needed to cool the market. NBC also states the implementation may also accelerate the market in the near term.

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Canadian Bank Regulator Readies To Reverse Extra Pandemic Mortgage Leverage

OSFI, Canada’s bank regulator, announced they would be tightening uninsured mortgage leverage. The stress test mortgage rate will increase from 4.79% to 5.25%, reducing max budgets by up to 4.5%. The changes revert the pandemic-easing, which they thought was needed for borrowing. Before the pandemic, OSFI had been planning to loosen the test, not tighten it like they now will be doing.

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Canadian Real Estate To Cool Later This Year, “No Urgency” For Measures: Scotiabank

Canadian real estate markets will cool later this year, says Scotiabank. The Big Six bank suggested policymakers leave the market and watch how it moves over the next few months. They expect listings to rise for the spring market, as well as slow demand. The combination is expected to cool the market on its own. Additional measures run the risk of overly penalizing market holders. 

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Why Don’t Real Estate Developers Build More Purpose-Built Rentals? Interest Rates

Academics cite everything from NIMBYs to government policy for the lack of new rental developments. It would appear they’ve never just asked a developer, because they’ll tell you, it’s about profit. Falling interest rates inflate buyer budgets, leading to a greater opportunity to sell. The more interest rates fall, the more attractive it is to create homes for sale than rent. After 30 years of falling rates, it’s not surprising they need to pay developers to build them. Private real estate development is a business, not a public service. Just raising interest rates might be enough to change the trend.

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Toronto Real Estate

Toronto Real Estate Prices Rise More Than Half The Median Wage In A Month

Owning Greater Toronto real estate has recently been a better job than most could ever hope for. The price of a typical home reached $1,007,600 in March, up an unbelievable 16.54% ($142,400) from last year. The gain in the suburbs was more than twice the size of the increase in the city. 

One of the interesting points is how much prices increased in just a month — $38,000. That’s for TRREB and the City, implying location of the homes didn’t matter, the monthly increase was across the board. An increase like that is usually due to emotional factors, rather than fundamentals. It’s widely believed the BOC’s assurance to ignore data, and pump cheap credit for a predetermined amount of time, is behind it. 

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  • Anonkumar Oogur 3 years ago

    The problem is not bank of canada.the blame should equally between all the players.Have a brain storming between all those concern with honesty and sincerity,we will get all the answer.
    The solution to create a win win solution for every one.
    1)Real estate be considered as control good.
    2)Policy makers should the following decions
    a)listing should be based on e.g for b.c on b.c assessment with a flexibity of 5% either way.
    B)A buyer biding over the listing price be tax at 20%.
    C) Such a non compulsory tax.It all on the buyer.If buyer feel he want to pay tax,its their choice.
    D) Government get more income which can use for develpment without imposing a compulsory tax.
    E)such the economy is well protected.

  • Joy Dhillon 3 years ago

    Canadian banks don’t check the background of documents supporting income, large number of people earn good income just by distribution of salary checques to needy. The banking system should work deeply like indian banking to avoid bankruptcy in future.
    I think indian banking system is powerful than Canadian banking systems in the regard to mortgages and loans

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