Report: Toronto real estate is the most vulnerable among major Canadian cities

An RBC economist calls for stricter mortgage rules to contain an overheated market

The Toronto real estate market is at a high degree of overall vulnerability, the Canada Mortgage and Housing Corporation (CMHC) said in a recent Housing Market Assessment.

The federal agency singled out Toronto as the most overheated real estate market among major metropolitan cities in Canada, echoing a similar claim in the UBS Global Real Estate Bubble Index last fall. Montreal and Vancouver remain moderate, while the excess rental market inventory and overvaluation in house prices in Toronto real estate reinforce the notion that the city is sitting on a bubble.

Overheating in the housing market is a nationwide issue, according to CMHC. Even Toronto is faring better than real estate markets catching buyers leaving the big city for larger, greener properties.

According to Royal Bank of Canada economist Robert Hogue, real estate prices are rising fastest in small towns like Mission, British Colombia, Tillsonburg, Ontario and Moncton, New Brunswick.

In a report published Wednesday, Hogue urged municipal and federal governments to take action to contain the overheating in Canadian real estate. He says what is making matters worse is that buyers and sellers expect prices to continue to escalate, which is “pumping up mortgage borrowing” at the strongest rate (7.2 per cent in January) in nearly a decade.

“Surging prices are also pulling demand forward, with many buyers opting to act now for fear they’ll miss out,” says Hogue, reiterating the usual pandemic talking points that blame the near-hostile demand in the housing market on low mortgage rates and desire for more space during lockdown. “The factors driving the current frenzy will eventually reverse or run their course.”

Hogue adds that overheated markets could destabilize the economy when a correction hits, explaining that Canada hasn’t had a real estate market overheating at this level since the late-1980s.

Rogue is urging the governments to accommodate more supply, particularly adjusting municipal zoning to build “medium density” in big cities (or “missing middle” homes) and affordable rental housing.

He’s also suggesting stricter mortgage rules, including a higher minimum on down payments and lowering the cap on refinancing. He recommends the government steer clear of taxing transaction (like the land transfer tax) inhibiting the mobility of Canadians who need to move to a “better-suited” home.

Hogue also entertains ideas that he admits are more controversial but perhaps necessary to discourage speculative behaviour from investors looking to profit from surging real estate prices and fueling further volatility.

“We find New Zealand’s just-announced phasing-out of mortgage interest expense tax-deductibility for investors an interesting proposal,” he writes.

Among those ideas are phasing out the ability for investors to expense mortgage interest from their taxes. Hogue even suggests a reconsideration of a “sacred cow” like the principal residence exemption from capital gains tax, meaning sellers need to fork up a percentage on the profit they make from selling their home.

He also says governments should resist providing more help to first-time home buyers, which would further heat up demand, drive up prices and inflate household debt.

“Policymakers should put everything on the table,” says Hogue.


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5 responses to “Report: Toronto real estate is the most vulnerable among major Canadian cities”

  1. Speculation interest should removed as an expense and there should be a limit on number of private home tax exemption especially for builders who have famously flipped since the the dawn of time. Farm property tax exemption should be prorated or removed over a certain square footage.
    Supply constraints remain the number one issue for housing crisis

  2. There are 2 issues. Not enough detached housing is being built which families want. The other issue is that foreign investment needs to be banned in the residential market.

    • Foreign buyers play mainly in the condo market as they rent these. The detached house is driven by local demand. Lets start with simple adjustments to curb this madness, such as getting rid of the blind bid process. I recently sold my condo and received 2 bids. My agent went to the higher bidder telling them that there is a 2nd bid and if they wanted the place they needed to up their offer. The 2nd lower bidder had no intention to up his bid, but the 1st bidder did not know that and offered 45K more than initially offered. So he paid 45K more than what he offered even though he could have gotten the condo on his initial bid. This is happening all the time and should stop. All bidders should know what’s on offer.

  3. There should be a minimum holding time on property prior it’s been sold. This hold determines the eligibility for the primary home, tax benefits. This will help to control the flipping business and the assignment sales. These are the two segments the investors use the system to exaggerate the price.

  4. While stricter policy is a must, including stricter mortgage rules, punishing first time home buyers is far from a meaningful solution. Tighten up the investment space and upsizing opportunities that is working against families struggling to put a single roof over their head.

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