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Analysis: Rising rates to cool Ontario housing market more than pre-election promises

A home for sale sign is shown in a Toronto west-end neighbourhood May 8, 2020. THE CANADIAN PRESS IMAGES/Graeme Roy

With an election looming, Canada’s province of Ontario is moving to rein in surging home prices with populist measures like a bigger foreign-buyer tax, but economists warn rising interest rates are likely to do most of the work.

Already there are signs the red-hot markets are cooling after last month’s central bank rate hike. Toronto’s average selling price dropped 2.6 per cent in March from February, data showed on Tuesday, and annual gains slowed.

“The higher rates will douse the flames somewhat,” said Sal Guatieri, a senior economist at BMO Capital Markets. “We likely will see sales pull back from elevated levels and almost certainly see a slowing in unsustainable house price growth.”

Mortgages are fast becoming more expensive with the Bank of Canada signaling multiple hikes this year. Economists are betting on a rare half-point increase in April, with the policy rate seen above pre-pandemic levels by year-end.

Read more: Ontario introduces new legislation to increase housing supply in province

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This is a sharp shift from ultra-low borrowing costs that helped drive a pandemic price surge. Canada’s average home price soared 50.6 per cent over two years to a record high of C$816,720 ($654,213).

With housing affordability becoming a political liability, governments are stepping up efforts to bring prices under check. Housing is set to be a focal point in Thursday’s federal budget, one senior government source said.

In Ontario, where voters go to the polls in early June, Premier Doug Ford last week laid out plans to “cut red tape” on new home construction and to boost the foreign-buyer tax to 20 per cent from 15 per cent, while also expanding it to cover the entire province.

“Going after foreign speculation is always very popular. So I think that’s an easy one, politically, to do,” said Mike Moffatt, a senior director at the Smart Prosperity Institute think tank.

Non-residents held just over 168,000 residential properties in Ontario in 2020, worth C$66.9 billion, or about 3 per cent of all owned properties, said Andy Yan, director of the City Program at Simon Fraser University, citing official data.

While that is a relatively small stake overall, foreign capital plays an outsized role in certain markets, like newer-build Toronto condominiums, and can help drive price escalation, he said.

Yan also found that taxes can shift demand. By looking at the Bank of China’s Canadian mortgage disclosures, Yan mapped a surge of new lending in Ontario after British Columbia imposed a foreign-buyer levy in mid-2016.

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Read more: Changes to foreign buyers tax unlikely to quell Ontario market, real estate experts say

“The timeline for flows … makes me wonder if there was a push/pull effect between these two provinces,” Yan said. Ontario put in place its own foreign-buyer tax in 2017.

Bank of China did not immediately respond to an email request for comment.

But speculation is not limited to foreign money. Investors accounted for 20.6 per cent of home purchases in Canada by the second quarter of 2021, a Bank of Canada study showed, with investor activity highest in Ottawa and Toronto.

Ford also said his government would work with cities to establish taxes on vacant homes and on land speculation.

Even as politicians face demand to solve the affordability crisis, the Canadian economy’s increasing reliance on real estate means governments will stop short of any action that could kill the golden goose, experts say.

“It’s not just the sale of homes, but all the spinoffs you get. Contractor work, appliance sales, furniture,” said Christopher Alexander, president of real estate firm RE/MAX Canada. “The Feds are going to act a lot more cautiously.”

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