The average home price in the Greater Toronto Area shot up by 33 per cent over the last year, according to a recent report by the Toronto Real Estate Board.
But if you don’t own a home in Toronto and you’re not planning to buy one, should you care? Some economists and real estate watchers say yes. What happens in the GTA could affect people elsewhere in Canada, albeit mostly indirectly.
Real estate is a big part of the Canadian economy
According to Statistics Canada, residential construction accounted for about 6.8 per cent of Canadian GDP in 2013. But the impact is even bigger, said Andrey Pavlov, finance professor at the Beedie School of Business at Simon Fraser University.
Associated industries, like finance and construction, are also affected by changes in the housing market. Pavlov estimates that up to one quarter of Canada’s economy is linked to real estate in some way – though he says most people would put it closer to 12 or 15 per cent.
However, Toronto accounts for a fairly small part of that, he said. If there was a significant downturn in Toronto, “There would be some impact on GDP but I think the direct impact will be relatively modest.”
How people feel about home prices affects how they spend
“There’s a strong linkage between people spending in real estate and their spending in the economy,” said John Andrew, director of the Queen’s Real Estate Roundtable.
“If people feel like they’re home wealthy and they’re doing well and their house is worth a lot, they’re much more likely to spend in other areas including things that are unrelated to owning a home, like taking a vacation.”
Conversely, if millions of people in the GTA suddenly felt house-poor, their reduced spending could affect the overall economy. “Any correction in the GTA would I think really be felt nationwide because of that decrease in retail spending in other areas,” said Andrew.
Possible policy solutions could affect more than just Toronto
The strong Toronto housing market is driving up household debt, said Doug Porter, chief economist for BMO Financial Group. That means that the Bank of Canada is coming under increasing pressure to raise interest rates.
If the Bank did that, it would take effect nationwide – even for someone in Saskatoon.
“It’s going to really affect how much home you can buy and when you get into that market,” said Andrew. He thinks this move would make people outside the GTA and Vancouver resent the federal government.
“Imagine how people in Calgary feel with their depressed housing market and all of a sudden the Bank of Canada comes out and puts the interest rate up or the feds say we’re going to tighten up the mortgage lending rules and things like that,” he said.
Similarly, things like a foreign buyers’ tax or changes to the capital gains tax could affect people nationwide. These could be tweaked to focus only on overheated markets though, said Porter. A tax on houses worth more than $1 million would mostly affect Vancouver and Toronto, he said.
However, having a series of piecemeal regional policies might not necessarily make sense either, said Andrew. Putting a tax on foreign buyers in Toronto could just push those buyers to another city and overheat that market too.
People in other markets might be spooked by a Toronto downturn
Attention-grabbing headlines about Toronto could affect how people in other markets view their own real estate, said Pavlov.
A disaster in Toronto could discourage people elsewhere from entering the market, he said, by making them reluctant to enter bidding wars, for example.
Banks could get spooked too. “It’s the same big banks that lend in Toronto are the banks that lend elsewhere in Canada. If they start experiencing losses in Toronto, they’re going to become more cautious everywhere else,” he said.
As a result, people elsewhere in Canada “might notice it’s harder to get a loan.”